Ahh, Miami. I’d say it’s good to be back here at the Fontainebleau for ABS East 2011 but it’s been pouring and exceptionally windy so my time outdoors will be limited. Dechert attorneys Mac Dorris, Ralph Mazzeo, John Timperio, Cindy Williams, Larry Berkovich, Lorien Golaski, Andrew Pontano and I hosted a well-attended cocktail party Sunday night. It was great to catch up with our friends/clients in person.
Monday morning began with a general session where some blurbs about risk retention from this October 14 New York Times article were projected on two very large screens. I later attended the “Evolving Risk Retention Requirements” panel before lunch. It’s been a while since the joint regulators released the credit risk retention NPR back in March of this year. In response, hundreds of comment letters were submitted. Click here for the ones posted by the SEC. We have blogged repeatedly on this topic here at CrunchedCredit.
Recently there has been chatter that the regulators may re-propose a new risk retention rule for comment in lieu of promulgating a final rule.
Today’s panel not surprisingly reiterated much of what we’ve been posting on this blog about credit risk retention, namely that the number one point of contention with the rule is its mere existence. Second is that pesky premium capture cash reserve account (PCCRA). One panelist restated, as many comment letters have, that banks are not in the business of storing costs and profits until they can perhaps recoup them down the road, and that although some investors may have liked the general idea of the PCCRA, for the most part they have acknowledged the PCCRA just doesn’t work. Not to mention that such a beast was not even contemplated in the Dodd-Frank Act. This panel seemed to agree that the PCCRA would be a game ender. If it was intended to combat horizontal risk retention manipulation, one panelist noted that’s a legitimate goal and is supported. But if the consequence is preventing an issuer from recouping its costs and making a profit, where’s the incentive to do a deal in the first place?
The NPR also enumerated arguably conservative criteria for the Qualified Residential Mortgage (QRM), each of which such mortgage would be exempt from the risk retention requirements. One panelist asked– if you define an exception so narrowly, have you eliminated the exemption that Congress intended? And he reiterated the purpose of the QRM– to ensure safe and sound underwriting, not to establish a gold standard for residential mortgages.
Panelist Tom Deutsch, the Executive Director of the ASF, noted that industry groups tended to focus on the price differential when commenting on the risk retention NPR, whereas consumer groups came to the same conclusion about the rule (it needs some major overhaul), but in a different way. Consumer groups, he said, speak in terms of social inequality and argue that the QRM will create a two-tier structure with social policy implications– that those who fall outside the QRM won’t get as good a deal, not entirely unlike the GSE conforming loan limit structure. Tom noted that QRM isn’t relevant until GSE reform occurs anyway, because the GSEs aren’t subject to the risk retention rules as long as they are in conservatorship, and that GSE reform is not happening in the near future. Another panelist discussed the small pool problem that may occur if few QRMs are originated. He pointed out that loans may need to be warehoused longer to amass larger pools. It has been proposed by those in the industry that securitizations blend QRM and non-QRM in a securitization and calculate the risk retention requirement based on a weighted average basis.
There are compelling arguments that the regulators got this one wrong. And with so many comment letters addressing so many points, if the regulators put out a final rule that looks pretty much like the NPR, they will be accused of not taking into account all the solicited comments received. On the other hand, if the regulators put out a final rule that barely resembles the NPR, they will take flack about not soliciting public comment. The regulators were given
an arduous task in a relatively tight timeframe. And much is riding on the final outcome.
By Laurie Nelson.