The Federal Deposit Insurance Corp.’s (FDIC) Deputy to the Chariman for Policy Michael Krimminger said that the interim rule to extend the securitization safe harbor announced in November last year will most likely be extended beyond the March 31 end date.
These remarks were made at the panel called FDIC Securitization Safe Harbor Reform Proposals at the American Securitization Forum’s (ASF) conference in Washington, D.C. this week.
This would allow time, Krimminger said in separate interview with ASR, for the FDIC to come up with a final rule on the safe harbor provision after the comment period expires for the Advance Notice of Proposed Rulemaking (ANPR).
In this ANPR released on Dec. 15, the FDIC solicited comments from the industry regarding proposed amendments to the legal isolation safe harbor for off-balance sheet securitizations created after March 31.
After the comment period ends on Feb. 22, the FDIC will come up with a revised safe harbor rule that would take into consideration the industry’s feedback, and allow for another round of comments, which typically lasts another 60 days.
Background on the Safe Harbor
Since 2000, and the adoption of 12 C.F.R. Part 360.6, the FDIC has provided safe harbor protections to securitizations by stating that when a bank failure happens, the FDIC would not try to reclaim loans transferred into a securitization for as long as an accounting sale had occurred.
However, since the Financial Accounting Standards Board (FASB) changed FAS 166 and 167 last June, most securitizations will no longer meet the off balance sheet standards for sale treatment effective Jan. 1.
As a result of the FASB changes, on Nov. 12, the FDIC Board approved a transitional safe harbor that permanently grandfathered securitization or participations in process through March 31.
Comments at the ASF Panel
Speakers at the aforementioned ASF panel offered insight on the FDIC’s ANPR that also gives additional preconditions in place of giving assets the off-balance-sheet treatment. These preconditions have been described as RMBS focused.
The preconditions include that mortgage loans be held for 12 months before being securitized and that banks are required to retain a “material portion” or not less than 5% of the credit risk on the assets transferred in the securitization.
According to panelists, these specific preconditions could have a detrimental impact to the cost for holding mortgages such as a prime, Jumbo 30-year, fixed-rate mortgage or any loan that goes over the conforming limits. The capital and hedging costs would need to be passed on to the borrower. Speakers asked whether it would be possible to make distinctions between mortgages held by banks.
Krimminger commented that the ‘skin-in-the-game’ requirement was driven by the extrordinary losses in the subprime market. A problem, he said, with making distinctions between assets, is that these have proven to be “somewhat false.” He gave the example of the lack of differences between problems in subprime and Alt-A mortgages.
Speakers at the panel also said that these preconditions, along with other regulatory and legislative issues, will cause issuer bifurcation in the securitization market, creating a difference between large players that have alternative sources of funding and smaller participants that need liquidity. For instance, rules such as the FDIC’s will create discentives to securitize for financial institutions that have an option to raise deposits, which is much more straightforward.