Every once in a while we get some good news around the capital markets hood and this is one of those times. Admittedly, all we’re doing here is fixing a problem which was one of the unintended consequences of the Dodd-Frank regulatory regime and just gets us back to where we thought we were before the issue arose, but hey – a victory is a victory.
Earlier this year, a concern was raised amongst the Big Four accounting firms that the restrictions on transfer, hedging and finance imposed by a sponsor through the new risk retention third party purchaser agreements were inconsistent with sale accounting. That would be bad. No sale, then no recognition of gain and no de-recognition of the mortgage loans and no relief from the attendant risk-based capital charges associated with those loans on the balance sheet.
I vividly remember when one of my accounting friends told me about the issue last spring. First reaction, “No way!” Second reaction, “Oh, hell,” (that’s not exactly what I said) because the accounting literature is surficially clear. I could not see how the restrictions in a Third Party Purchaser Agreement could possibly be consistent with sale treatment. On the other hand, doing something the government made us do in order to make securitization better and safer, which actually destroyed securitization, seemed like a pretty absurd outcome. I’ll stick with the disease please. See our commentary dated May 9, 2017.
So after a period of anxious hand wringing, a cross section of major banking institutions trundled off to the SEC to see if the SEC could square the circle and make this better. In a man bites dog sort of way, the SEC has apparently come through and advised all of us laboring away in the capital market trenches that “the restrictions placed on the TPP [third party purchaser] resulting from the Rule do not cause the transferors to fail to meet the conditions in ASC 860-10-40-5(b).” In slightly plainer language, that means that the third party purchaser agreements that we have come to live with, if not love, over the past year work just fine.
Before I tear up and start waxing poetic about the righteous hearts and doughty performance of our regulatory establishment, one caveat. The SEC has not actually written anything. The industry has written a letter to the SEC outlining what the SEC would say, if they had said something. And that’s as much as we’re going to get. A little weird, but the insiders tell me this is how the SEC rolls on issues like this. Can anyone say plausible deniability? One might remember the line used by Francis Urquhart in the House of Cards (the original British version, mind you), when confronted with a hard question, “You might say that Mattie, but I couldn’t possibly comment.” Please note that Mattie was defenestrated from the roof of the House of Parliament soon after by the said Mr. Urquhart.
Putting aside for a moment my anxieties around regulatory defenestration, the purported response by the SEC is a delightful, practical and common sensical answer. I wish I were shocked by the fact that I find practical and common sensical guidance from the Olympian Heights of our regulatory state shocking, but I do not. For a brief shining moment our regulators took the “kick me” sign off the backside of the banking industry and did the right thing. God bless.
This is important because it validates (or perhaps revalidates) one of the principal means of meeting the risk retention requirement in our CRE securitization sector. Of course, the prudentially regulated banks could have held risk retention as a vertical strip, or found a non-bank co-sponsor with less sensitivity to GAAP and no sensitivity to risk-based capital charges, to become a sponsor and hold the vertical (or horizontal) strip but the reinvigoration of the TPP solution is good news indeed.
Hey, it’s the Holiday Season and all (I’d say Christmas if my editors would let me), and since the SEC staff seems to be in such a giving mood, maybe the time is propitious for delivering a more robust Santa’s list? After all, we’ve been good this year, right?