On April 7, the SEC opened up for comment its proposed rules that would fundamentally revise the regulatory regime for asset-backed securities. As stated by Chairman Shapiro in her announcement of the rules, "[t]he proposed rules are intended to better protect investors in the securitization market by giving them more detailed information about pooled assets, more time to make their investment decisions, and the benefits of better alignment of the interests of issuers and investors through a retention or "skin in the game" requirement." Query, wasn't that what Reg AB was suppose to handle, especially for transparency and information. And what ever happened to Static Pool data. Is anyone still filing (I can tell you that Litton isn't on many of its sub-prime deals).
Ms. Shapiro goes on to state that "as we know all too well, securitization . . . played a central role in the financial crisis." That is like trying to blame Enzo Ferrari for your car not starting after you put dog-sh_t in your gas tank. Securitization structures may have facilitated the capitalization of bad mortgage loans, but it was the loans, and not the securitization structure, that was the culprit of the financial meltdown.
So what are the proposals? Well, first on the information side, the SEC proposes requiring ABS issuers to file with the Commission standardized information about the specific loans in the pool at the time that the asset is securitized and on an ongoing basis. Additionally, these issuers would be required to file on the SEC Web site a computer program of the cash flow provisions, or "waterfall" in the securitization structure. And lastly, the SEC want to give investors a 5 day look-see.
Well, I guess the SEC thinks that investors of ABS securities are "Mom and Pop" investors, without the where-with-all to have these technical abilities. And what are the "standardized" information that is not already required in the Prospectus Supplement that will give investors better knowledge of the loan level issues. Maybe an information point should be which loans, and what percentage of the pool, were written outside the underwriting guidelines. You know, the loans that did not meet the nice disclosure contained in the Prospectus Supplement.
Next, the SEC proposes to rid itself of the references to the ABS' credit rating as an eligibility requirement for shelf registration, replacing this instead with four new eligibility criteria: (1) the chief executive officer of the ABS depositor would need to certify that the assets have characteristics that provide a reasonable basis to believe that they will produce cash flows as described in the prospectus (2) the ABS sponsor would be required to retain a five percent "skin in the game" interest; (3) the ABS issuer also would be required to provide a mechanism whereby the investors could confirm that the assets comply with the issuer's representations and warranties; and (4) the ABS issuer would have to agree to file Exchange Act reports with the Commission on an ongoing basis.
Boy, I don't know where to start. So, instead of having an independent agency confirm their position on an ABS offering (I guess the government wants to get the rating agencies out of the business), we have an executive of the issuer certify that the cash flow works. Well, based upon what assumptions? That only 3% of the pool default? That the CPR is a certain %? This would turn out to be a worthless certification based upon assumptions. And don't we already get this somewhat covered in Reg AB and SOX certifications?
So, "skin-in-the -game". But didn't we always have that, in the fact that the originator kepts the residual piece (although NIM pieces changed that). And what 5%. -the top peice or the bottom piece that they could book on their balance sheet at some number based on market-to-market accounting rules as applicable on that day(Ms. Shapiro obviously does not remember the late 1990's securitization melt-down)
Representations and Warranties enforcement. Hum, isn't that the job of the Trustee and Servicer. I can tell you from personal experience that those "dead-head" Trustees are not doing anything to enforce rep and warranty issues. And the Servicers are part of the problem, since they are usually owned by the originator/sponsor of the ABS securities. And how are you going to have investor enforement of the reps and warranties? They would still have to go through the "dead-heads" who would then just turn into "bobble-heads".
Like with Reg AB, the SEC is making the required "Hill Noise" to make it look like they know what they are doing and are here to "protect" the investing public. What it will turn out to be is another failed attempt by bureaucrats pretending to fix a system they do not understand, rather than attacking the players that control the industry.
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