Dechert attorneys kicked off ABS East by hosting a Day 1 cocktail party at the Fontainebleau that was well attended by our friends and clients.
Day 2 of ABS East is underway. The Monday opening panel– Restoring Confidence and Rebuilding the Industry: The Role of Securitization– drew a pretty full house.
The general consensus is that the regulatory bodies are in the way and will cause delay in the recovery of the securitization market. I won’t go so far as to claim it wasn’t broke and didn’t need some fixing, but it’s clear the fixing to come is going to take a while. Without definitive rules, potential issuers can not evaluate the cost to enter the market. If we had a more targeted response to our problems from Congress and the regulators we could avoid this delay.
On the resi front, clearly the GSEs have crowded out private issuance, which has been facilitated by Congress and the Fed. Whereas commercial real estate found a natural bottom, the feeling is that resi never did. And, as one panelist put it, "distressed loans continue to pose a lingering cloud preventing meaningful recovery." The question was posed as to why there was nothing much after Redwood in the resi space. Again, the GSEs are dominating that space. Conforming loan limits have never been higher and it’s increasingly more difficult to even qualify for a jumbo loan under current underwriting criteria. With CMBS, it’s possible to get a reasonable number of loans. RMBS requires many more loans and there’s competition for the best loans.
With respect to spreads, it does seem like investor interest is there but there’s too much money chasing fewer products. Because new issuance remains low, there remains a downward pressure on spreads on existing product which is a great indicator.
Is there a role for the ratings agencies in the next generation of the securitization market? Obviously the ratings agencies think so– because it’s about analytics, and benchmarks, not just ratings. And ratings add liquidity. What remains key to investors is transparency. Investors say the ratings agencies were not as transparent as they should have been. They say ratings agencies get a lot of information and should be forced to disclose more to investors. Ratings agencies say the info should come from the issuer… There was a lot of information available in RMBS deals, but in auto deals, not so much. Yet auto deals have weathered the storm relatively well. So much info is out there, but most people don’t have the infrastructure to analyze it. There will be a huge build-up of info but what will people do with it? Processing that information is an expensive process. And the end user will ultimately bear the cost of it.
Any discussion of the recent legislative and regulatory issues ultimately leads to the question– Does Washington even want a securitization market? At the end of the day, yes. It’s a necessary piece of the economic puzzle. The Fed is clearly in favor of securitization. On the legislative side it’s murkier. The public still wants to assign blame. And there’s little evidence that’s changing. The risk is still significant that public sentiment goes the wrong way. As a result, we ended up with a legislative response that was overly broad and not strategic in its approach.
The real question is need. Investors and bankers say there’s definitely a need. It’s just a matter of defining what securitization is going to look like.
By Ralph Mazzeo and Laurie Nelson.