The clock is ticking.
Final rules requiring sponsors of securitizations to retain “skin in the game” were published in the Federal Register today. That means the rules come into effect for residential mortgage backed securities in exactly one year, until Dec. 24, 2015. For securitizations of their kinds of assets, including commercial mortgages, auto and student loans and below investment grade corporate loans, the rules come into effect tin two years. Deals issued up to that point will be grandfathered.
There’s a big carve out for RMBS: securitizations of “Qualified Residential Mortgages” are exempt, and the final rules equate QRM with the "Qualified Mortgage" standard used by the Consumer Financial Protection Bureau to define well-underwritten loans. QM carries no down payment requirement.
In addition to residential mortgages, there are also exemptions for securitizations of auto loans and commercial mortgages that meet specific underwriting criteria. But these exemptions are much more restrictive.
There is no carve-out for collateralized loan obligations. Managers will have to retain 5% of the notional amount of deals -- $25 million, for example, on a $500 million CLO.
The only workaround, which was introduce in the 2013 reproposal of the rules, and retained in the final version, is widely deemed to be unworkable: the leahd arranger of each loan held by a CLO could retain the 5% stake instead, and hold it as long as the loan is in the CLO. Banks have plenty of other demands on their capital.
The conventional wisdom is that the rules will lead to consolidation as smaller CLO managers will find it harder to comply. This could translate into lower issuance of CLOs, although, in the short term, issuance could be boosted as managers attempt to boost their assets under management before the rules take effect.
Wells Fargo expects CLO issuance to moderate in 2015, to $90 billion. By comparison, issuance for the first 11 months of 2014 was $115.4 billion, according to Thomson Reuters.
"The composition of the loan market may change, leading to more volatility," analyst David Preston said in research published in October. "Risk retention may become effective at an inopportune time: just as the credit cycle turns, short-term rates rise, and new bank regulations become effective or require increased compliance."
The Loan Syndications and Trading Association has filed a petition last month against the Federal Reserve Board and Securities and Exchange Commission in a D.C. Court of Appeals, asking the court to suspend the final risk retention rule. Kn its Nov. 10 filing, the trade group called the rule “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."