THE SEC's ATTEMPT AT SHOOTING THE MESSENGER

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.

First American Title - Do They See Trouble Coming

In the law suit filed by Bank of America against First American Title and its sister firm United General Title Insurance this month, BofA is looking to be paid its charge-off amount for title insurance issues. But rather than pay the claims on the 4,500 properties claimed by BofA, First American and United General denied 2,200 alleged claims and have not acted on another 2,300 claims.

Meanwhile, First American Corporation announced its desire to separate its two operating divisions, the Financial Services Company and the Information Solutions Company, into two separate publically traded entities. The Financial Services Company would hold the title insurance companies (with all the liability) and the Information Solutions Company  would have  the services like CoreLogic, without the title insurance liability. HUMMM?

Moody's Fires A Warning Shot at the Fed.

From the March 15, 2010 article in the New York Times by David Jolly[http://www.nytimes.com/2010/03/16/business/global/16rating.html?hp]  Moody's was reported as saying that "Major Western economies have moved “substantially” closer to losing their top-notch credit ratings, with the United States and Britain under the most pressure . . ." Even better is their comment that “their ‘distance-to-downgrade’ has in all cases substantially diminished.”

For those that can read between the lines, Moody's statement of “Preserving debt affordability (the ratio of interest payments to government revenue) at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion” looks like a veiled threat against Congress, given that the Obama administration is looking to increase federal debt to 64% of G.D.P. Looks to me that they are saying we are going to have a significant tax increase to cover federal debt service.

As reported, U.S. debt currently remains affordable, as the debt affordability ratio fell to 8.7 percent in the current year, after peaking at 10 percent two years ago. If that trend were to reverse, which it would based on the desire to increase federal debt, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”

And what exactly is the testing of "social cohesion." Is Moody's worried about the outbreak of anarchy if the U.S. Governmnet raises taxes and cuts more social services (the fiscal adjustments) to cover its debt service to avoid a downgrade? I think they are.

I guess if the government wants to keep their ratings up (and limit the cost of raising more capital in the world market) Congress should not investigate how Moody's (or S&P) concocted AAA ratings for sub-prime mortgage securitization structures where the loans underlying the securities were comprised of such strong products like 2/28 interest only teaser rates, negative amortization and "pick-a-payment" loans. Clearly, Moody's thought that those securities were well worth their AAA rating. I wonder about the debt affordability factor that Moody's used in their analysis of those structures.

FANNIE/FREDDIE PLAYING THE FASB 157 CARD

From February 11 Wall Street Journal Article by Nick Timiraos, Fannie and Freddie are stepping up their efforts to purchase some $200 billion of delinquent mortgage loans in their securitization structures. Rather than waiting the 24 month period on a delinquent loan, they mortgage-finance giants are looking to buy those loans out after only going delinquent 120 days.
Good news for investors, as Freddie said that it would buy "substantially all" of its 120 day delinquent portfolio, to the tune of about $70 billion, in one single shot. Fannie is looking at a $127 billion portfolio of delinquent loans, which is claims will be repurchasing over a period of time.
Remember, the federal government took over these two organizations a year and a half ago, and providing  over $110 billion from the Treasury. In December, the government agreed that it would cover an unlimited position of losses over the next three yeears, which means that the organizations can't lose. Plus, they can hold the assets and mark-to-market under FASB 157, giving them stronger balance sheet position.

Repurchases - Fannie/Freddie Start Chasing the Money

From the January 30, 2010 Wall Street Journal article by Nick Timiroas, Fannie Mae and Freddie Mac are starting the process of chasing down mortgage originators (or their successors) for repurchase obligations. With about $300 billion in loans to borrowers at least 90 days behind on payments, Fannie and Freddie have started to sift through mortgage files for proof of underwriting flaws. The default is usually the first sign of a possible breach of a representation or warranty in the mortgage loan sale document.


The result so far, as reported by Mr. Timiroas, is that Freddie Mac required lenders to buy back $2.7 billion of loans in the first nine months of 2009, a 125% jump from $1.2 billion a year earlier. Mr. Timiroas reports that Fannie Mae won't disclose its figure, but trade publication Inside Mortgage Finance said Fannie made $4.3 billion in loan-repurchase requests in the first nine months of 2009. This corresponds to the fact that the loans would probably have a origination dates in 2006 and 2007, where the quality of the underwriting and the type of loans originated (i.e. stated income, interest only 2/28 and 3/27) would give rise to significant defaults.


While this report was for the Fannie/Freddie portfolio, the non-agency paper would have a corresponding need for increased scrutiny of its defaulted portfolio. The issue is whether the private investors of RMBS have the same desire to chase after money that belongs to them. SASA can provide that support.

SEC Grows Its Risk Oversight Division

The Securities and Exchange Commission announced on Thursday (10/05/09) the appointment of a new senior policy maker and two counsels to the new Division of Risk, Strategy and Financial Innovation. The senior policy advisor to the division will be Richard Bookstaber, a published author on risk management and finance, who has a Ph.D. in Economics from MIT and has previously held senior positions in risk management at Salomon Brothers and Morgan Stanley. Joining him in counsel roles are Adam Glass, formerly head of structured finance at the law firm of Linklater LLP, and Bruce Kraus from Willkie Farr & Gallagher LLP.


The division was established to perform all of the functions previously performed by Office of Economic Analysis and the Office of Risk Assessment, along with other functions to “provide the Commission with sophisticated analysis that integrates economic, financial and legal disciplines. The division's responsibilities cover three broad areas: risk and economic analysis; strategic research; and financial innovation.” This means that the division will be responsible for: (1) providing strategic and long-term analysis; (2) identifying new developments and trends in financial markets and systemic risk; (3) making recommendations as to how these new developments and trends affect the Commission's regulatory activities; (4) conducting research and analysis in furtherance and support of the functions of the Commission and its divisions and offices; and (5) providing training on new developments and trends and other matters.

The Risk, Strategy and Financial Innovation division is currently headed up by director Henry Hu, a University of Texas School of Law Professor who was appointed in September of this year. Professor Hu holds the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law and has written on bank, derivatives, hedge fund, and mutual fund regulation, corporate governance, global competitiveness of U.S. derivatives markets, model risk, risk management, and swaps and other financial innovations. More recently, Professor Hu was the lead author on a series of pioneering articles on the "decoupling" of debt and equity, its impact on corporate and debt governance and world systemic risk, and possible disclosure and substantive responses, as stated in the SEC press release of Mr. Hu’s appointment.

New Fannie Mae Program May Have Gotten It Right - The D4L Program

Under a program announced on Thursday (10/5/09) by Fannie Mae called Deed for Lease, qualified borrowers would be able to remain in their residences by signing a lease voluntarily transferring the property deed back to the lender. The new program is designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under Deed for Lease, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at a market rate.

To participate in the program, borrowers must live in the home as their primary residence and must be released from any subordinate liens on the property. Tenants of borrowers in this circumstance may also be eligible for leases under the program. Borrowers or tenants interested in a lease must be able to document that the new market rental rate is no more than 31% of their gross income.


Naturally, there is a small catch - Pets. “Certain pets may pose a liability threat to the tenant and the landlord,” Fannie Mae said. “For this reason we may require tenants with pets to secure renters insurance, which includes liability coverage for pets and names Fannie Mae as an additional insured.”

Does that include goldfish?