Securitization forum looks for louder voice as Congress overhauls Wall Street

The industry behind asset-backed securities at the heart of the financial crisis is starting to cut a larger profile in Washington as Congress overhauls Wall Street regulations.

For years, the securitization industry was a darling of financial markets and was hailed as a key innovation freeing up credit.
Then came the housing crash and financial meltdown.

Lawmakers and regulators began looking at securitization with a wary eye. Sub-prime and other home loans had been packaged into securities that often obscured the risks of default. And when they defaulted, the troubled securities weighed heavily on banks and other financial firms.

Securitization markets dried up and regulators and lawmakers began looking for new restrictions.

Earlier this year, the American Securitization Forum (ASF), which has more than 300 member companies, began taking on a louder voice in Washington.

The association broke off from the larger Securities Industry and Financial Markets Association (SIFMA). The group rented new office space and began hunting for lobbyists. ASF is looking to represent the whole range of firms involved in the securitization process.

“I think there is a significant base, but we’ll need additional resources to develop,” said Tom Deutsch, ASF’s executive director, in a recent interview.

Deutsch said his board felt SIFMA was too large and focused on too many issues to devote itself specifically to securitization.

“Ultimately they made it very clear that ASF would have to somehow be beholden to their terms of working in SIFMA or that ASF was no longer real welcome,” said Deutsch, who testifies regularly on securitization issues.

After the two groups split, SIFMA started an internal securitization group. Andrew DeSouza, spokesman at SIFMA, said the group is still expanding and will add staff. Other lobbying associations also have closely worked on the issue, including: the Commercial Real Estate Finance Council, American Bankers Association and Mortgage Bankers Association.

Financial overhaul legislation, delayed by other issues like healthcare reform, is now pending in the Senate, and promises major changes to securitization markets.

Among the biggest would be a requirement that loan originators keep “skin in the game,” or retain a portion of risk so there is an incentive for lenders to make high-quality loans. The House and Senate legislation would require lenders to keep on their books 5 percent of the value of loans that could be made into asset-backed securities.

Deutsch has concerns about the restriction that are shared by some Senate Republicans.

“Requiring an arbitrary 5 percent risk retention doesn’t necessarily do a great job of aligning the incentives between originator and investor,” Deutsch said. He favors a system whereby originators would face stiffer penalties if and when a loan goes bad.

“If a borrower goes delinquent, I have to buy not just 5 percent back, but 100 percent back,” Deutsch said.

Sen. Bob CorkerRobert (Bob) Phillips CorkerTrump signs massive spending bill, backing away from veto threat The Hill's 12:30 Report Deficit hawks encourage Trump veto of spending bill MORE (R-Tenn.) recently said lawmakers have to be “really careful” on risk retention and be aware of the “unintended consequence” of reducing credit. Corker said the issue was one of the last unresolved concerns between Republicans and Democrats before bipartisan negotiations broke off.

Deutsch said in a statement that Senate Banking Committee Chairman Chris Dodd’s (D-Conn.) bill “will have the effect of severely limiting balance sheet and lending capacity over time.”

Deutsch is also working on a series of concerns about regulatory and accounting decisions that require firms to keep more capital on hand.

Meanwhile, Deutsch expects 2010 to be a weak market for many types of securitized assets. At the end of March, the federal government is ending the Term Asset-Backed Securities Loan Facility that was created during the crisis to support the securitization markets.

Commercial real estate loans packaged into securities may suffer because of the overall decline in the commercial real estate market. And the market for residential mortgage-backed securities will also be weak because of the housing market’s ongoing woes.

“There will be hopeful green shoots, but there is still a lot of watering and planting in those markets before they get back to normal,” Deutsch said.