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Regulations Continue to Worsen ABS/Non-Agency Liquidity Squeeze

Alternatives like Rule 144A offer some relief

Faith Schwartz    |    Housing Policy


As top players in the asset-backed securities market met in Las Vegas at the end of February, they continued to confront a market that still shows few signs of regaining its pre-mortgage crash luster. The ABS/non-agency RMBS market remains mired in a hard liquidity squeeze. But at least one vehicle shows signs of life—if issuers are willing to take on some credit risk transfer.

No one wants the bad old days of subprime ABS to return. But a functional non-agency residential mortgage-backed security market is an essential step toward a market not absolutely dominated by the federal mortgage agencies.

Suburban homes

Suburban homes

Just how stunted the non-agency market is can be seen by the number of issuers now, compared to the number there were before the crash. In 2007, there were about 125 issuers. For 2015, there were about 10.

So it is interesting to see if the 144A market will continue to provide a way around some of the obstacles currently in the way of private label securities. It’s telling that all non-agency in the past two years have come through private 144A deals. In fact, most of the issuance since the crisis has been through private 144A deals.

The Securities and Exchange Commission sculpted the 144A rule in order to boost liquidity by providing a safe harbor for the resale of restricted or control securities in the private market (Rule 144 covers the public market).

The non-agency RMBS market now stands at about $700 billion in outstandings, and with Reg AB II of the Dodd Frank Act restricting the public market (it requires specified asset level information about each of the assets in the pool in an effort to improve investor protection and insure a more efficient ABS market), 144A deals, which were excluded in Reg AB II, are a viable alternative. Structured Agency Credit Risk (STACR) deals, with a shift to agency credit sharing is slowly growing, with a credit curve expanding into nonperforming.

Recent testimony to Congress from Structured Finance Industry Group before the House Subcommittee on Capital Markets and Government Sponsored Enterprises just underlines how squeezed the industry feels.

Liquidity will continue to suffer from a spate of overzealous regulations, said a spokesman for the group, and “pose a serious threat to securitization as a critical source of funding for the real economy.”

The Liquidity Ratio (LCR) rules, he testified, in effect classify all ABS as illiquid, a blanket exclusion that is totally unwarranted. High quality ABS are among the most liquid securities there are, he said.

Regs like AB II and others have “created significant changes across practices of the entire securitization industry,” the spokesman, Richard Johns, told the lawmakers. “Under some circumstances, LCR treats committed liquidity and credit lines as more detrimental to a bank’s liquidity than justified.”

Basel III isn’t much better, he said. “The final rule requires higher levels of capitalization than is warranted based on performance history, particularly when compared to competing forms of financing such as secured lending or covered bonds.”

Industry always squawks under regulatory burdens real and imaginary, but here there really seems to be something to kvetch about. And if Congress and the regulators aren’t inclined to provide any relief, an important industry in need of serious liquidity needs to look for end-runs around them, as the 144A currently provides.

(Part I of II on the private-label securitization market. A second blog, by Sam Khater, will focus on the traditional PLS market and prime jumbo.)

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