Despite all the troubles that the structured finance sector is experiencing, it is still worth saving, said Richard Field, managing director at TYI, LLC, in a presentation at Information Managment Network's ABS East conference that started Sunday.
Field said that structured finance boosts the safety and soundess of the banking system, although it was the Implementation "that went wrong." He added that it is the lending aspect of the business that presents credit, such as when borowers don't pay their loans, and interest rate risk.
In his presentation, Field proposed the sollution of real time collateral level transparency, which he called the "cornerstone of a deep liquid market. It restores trust, confidence and the willingness to invest in structures."
Real-time collateral level transparency enforces market discipline by issuers. It would allow market participants to independently value securities, instead of bidding on these blindly. With this type of transparency, it would eliminate the dependence on the "fear-based" ABX index since, unlike the ABX, there will be no lag time in the data and results will be based on actual performance.
"The valuation differences narrow as it allows for common ground," Field said. Another benefit he mentioned was that this would allow rating agencies to make timely adjustment to their ratings.The move toward this type of transparency "is far better than regulation and any bailout
program," Field said. Since there will also be less reliance on third-party pricing information, this would elimanate competition and level the playing field.
Field explained that his proposal will use indifidual loan data subject to HIPAA standards, so tne data used will not be traceable to particular individuals. The data will also be from the close of
business the previous day, so market pariticipants will have the infromation before the credit market opens the following day. In an RMBS securitiy, for instance, where the important dates are the 1st, 15th and 30th of the month, by the 2nd day of the month, market participants would have known what was paid on the first. The one-month lag time is eliminated as the real-time data accelerate report disclossures. These will also go beyond RegAB's minimum disclosure rules, Field said.
He expects to apply this to other asset classes as welll, including credit cards, autos and student loans. Field said that the data would come from the billing and collection system of each issuer which come out daily. "It's more complicated to come up with servicing reports," he said, comparing it to the dailybilling and collection reports which are readily available.
Real-time collateral level transparency, Field said, would be advantageous to hedge funds that deal with riskier assets, specially as credit risk goes up the credit structure. He added that tthis will be expanding data points by providing information in real time. For instance, FICO, which industry participants rely on, is only updated monthly.
He proposed that Fannie Mae and Freddie Mac will first implement the best practices for their secutities for the next six to eight months, and then the rest of the market the will follow 12 to 18 months after.
In terms of costs, Field said that it would be three basis poihnts for historical deal data and five basis points for future deals. The servicing cost will be focused on the sub-servicer, which would have a great interest in gaining back access to the capital markets, Field said.
