ASR032014

Asset
securitization
The Premier Guide to Asset and Mortgage-Backed Securitization
REPORT
March 2014
Volume 14, Number 3
StructuredFinanceNews.com
REHAB
Housing Boom-ERA moRtgAgEBonds,
wRittEn off As toxic wAstE duRing
tHE finAnciAl cRisis, ARE pERfoRming
BEttER tHAn ExpEctEd
C1_ASRMar14 1 2/26/2014 10:42:41 AM
Twitter.com/structuredn
C2_ASRMay11 2 4/26/2011 2:52:10 PM
A
CONTENTS
pEOplE
23 Canellos Hops from SEC to Milbank

OBSERVATION
6 How to Judge the Senate GSE Bill
In setting the threshold for private capital,
the designers of any newplan must contem-
plate the effects on market stability.
>> By Clifford Rossi
8 Multifamily is Starting point for Reform
The fnancing and management of mul-
tifamily housing varies greatly fromthe
model used for single-family housing, and
calls for different solutions.
>> By Shekar Narasimhan
and James B. Lockhart
9 possible Fix for EU Risk Retention
Anewconcession may assist managers of
U.S. collateralized loan obligations in access-
ing an investor base in the region.
>> By Nick Shiren and Robert Cannon
ABS
14 Another Volcker Workaround for ClOs
CLOmanagers have found another way to
avoid running afoul of the Volcker Rule, and
this one doesnt rely on avoiding bonds.
20 Cracking the Tape on Student loans
MeasureOne founder Dan Feshbach thinks
that loan-level disclosure can do for
the student loan market what it did for
mortgages.
24 Raj Dates Firm to launch Subprime Card
25 private Flood Insurance Gaining Traction
26 Reg AB Returns from limbo.

MBS
16 Tough Questions for Ocwen
22 Waning Refs Make New RMBS Safer
28 Jp Morgan Keeps Growing Multifamily

GlOBAl
18 Why Emerging Markets ABS Wont Falter
Many of these economies are stronger than
they were in the late 90s, and lending can be
funded in local securitization markets.
10 COVER STORy
>> by Bonnie Sinnock
REHAB
HOUSIng BOOM-eRA MORTgAge BOnDS,
wRITTen OFF AS TOxIC wASTe DURIng
THe FInAnCIAL CRISIS, ARe peRFORMIng
BeTTeR THAn expeCTeD
www.StructuredFinanceNews.com // March 2014
003_ASRMar14 1 2/26/2014 11:08:58 AM
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Asset
securitization
The Premier Guide to Asset and Mortgage-Backed Securitization
REPORT
ecuritization
RT
ecuritization
RT
Asset Securitization Report // March 2014
004_ASRMar14 1 2/25/2014 11:38:49 PM
The Public & The Private
EDITORS LETTER
T
his issue has the government all over it, not unlike the industry itself over the past
few years.
From a regulator taking Ocwen to task to a National Flood Insurance Program
possibly eying cat bonds, theres no denying the persistent presence of government and weve
got the stories to prove it.
Tats not to say the markets sitting around and waiting. In fact, theres plenty of activity.
In our cover story, Bonnie Sinnock from sister publication National Mortgage News shows
how that big pile of toxic RMBS issued during the boom years is looking better and better. Kate
Berry from American Banker reports on JP Morgans push into multi-family lending in New
York, where its played second fddle to competitors. And ABs Kevin Wack wrote on Fenway
Summer thats launching a subprime credit card.
Also on the private-sector side of things, I did a Q&A with MeasureOne founder Dan
Feshbach, who wants loan level disclosure in the student loan market to go as deep as it has in
mortgages. Feshbach also founded LoanPerformance, which helped pioneered disclosure in
the mortgage space. And now hes pounding the pavement to do the same with student loans.
But in the other pages, the public sector looms large. In another piece Berry examines
the move by New York regulator Benjamin Lawsky to halt a portfolio purchase by mortgage
servicer Ocwen, calling into question the servicers aggressive growth. But the move raises a
serious question if Ocwens not allowed to make a dent in the $1 trillion in delinquent-loan
servicing expected to change hands in the next few years, can its peers absorb all that?
John Hintze reports on the recurring topic of Reg AB II. Te fate of the proposed changes
to this rule may remain in limbo following the SECs postponed vote, but that may not be a bad
thing as the industry takes issue with some of the provisions.
Hintze also looks the governments National Flood Insurance Program. As it looks for ways
to ofoad risk, the Government Accountability Ofce has endorsed cat bonds as a possible
solution.
Meanwhile, in an observation, Chesapeake Risk Advisors Principal Clifford Rossi tackles
GSE reform, warning that Congress should avoid passing something that is politically expedi-
ent without fnding the right level of government guarantee that will spur private investment
while not alienating Republicans.
Finally, theres a piece by Nora Colomer on the resilience of Emerging Markets securitiza-
tions. Russian and Turkish deals are well cushioned against foreign turbulence, and for difer-
ent reasons. Nora tells us why.
Allison Bisbey, Editorial Director
005_ASRMar14 1 2/25/2014 11:38:56 PM
T
he Senate Banking Committees
attempt to bring private capital
back into the secondary mortgage
market gives high hope that, afer fve
years of political inertia, meaningful gov-
ernment-sponsored enterprise reform is
fnally within reach.
Unfortunately, weve seen this play
out before: plan afer plan gains interest,
but fails to muster the broad support it
needs. Sens. Tim Johnson, D-S.D., and
Mike Crapo, R-Idaho, now run the risk
of proposing a second-rate solution for
the market to gain mass support for the
new legislation. Teir forthcoming bill,
however, presents a real opportunity to
get housing policy right. As we await
the latest version of GSE reform, what
should we look for to determine whether
it is landmark legislation?
With the Corker-Warner plan serving
as the benchmark for any new proposal,
the biggest issue at hand is the nature of
private-public risk-sharing in mortgage
credit risk. Some proposals in the past
have penciled out any form of federal
insurance on non-Federal Housing Ad-
ministration mortgages. However, the
consensus is that a level of federal support
for losses well outside expected levels is a
more likely policy outcome. Whether the
line is drawn at 5%, 10% or anywhere in
between, for the next generation second-
ary market to thrive, there must be some
limited form of government guarantee
present to reduce potential investor fight
during times of crisis.
In setting the threshold for private-
public capital, the designers of any new
plan must contemplate its efects on mar-
ket stability. Say what you like about the
GSEs, even an implicit (at the time) feder-
al presence in the conven-
tional conforming second-
ary market had a calming
efect during market fare-
ups. If private capital is to
absorb the vast majority
of losses, that efectively
makes the secondary mar-
ket extremely dependent
on the discipline of in-
vestors to stay the course
when times get tough. We
only have to look as far as
to what happened to the
private-label mortgage-backed securities
market to see that when times get tough,
investors head south.
Placing a high threshold for when
public capital absorbs loss which would
be needed to bring widespread Republi-
can support to the table is not unrea-
sonable. But if something close to 10%
remains in the new plan, then it must
clearly establish conditions and the type
of market participants that can provide
the equivalent of neutral buoyancy for
the secondary market. Firms with strong
capital bufers, regulatory oversight and
deep credit risk expertise must have a
prominent role in order to provide a
countercyclical role through diferent
market conditions.
Another item of interest is the struc-
tural form of the secondary market. Tat
is, assuming some small role, should
federal insurance be provided by a gov-
ernment agency, market utility or some-
thing else? Morphing the Federal Hous-
ing Finance Agency into a combined
gatekeeper of securitization, regulator
of Federal Home Loan banks and cata-
strophic insurer is a recipe for disaster
down the road if it becomes politicized.
One only has to look over
at FHA within the Depart-
ment of Housing and Ur-
ban Development to see
the direct costs of politics
on the integrity of the $1
trillion plus Mutual Mort-
gage Insurance Fund over
multiple administrations.
Proponents of a broad
federal structure point to
the Federal Deposit In-
surance Corp. model and
its successes. However, it
isnt clear whether that example should
be held as the standard by which a new
mortgage secondary market should be
built. Deposit insurance premiums were
priced well below what they should have
been before the crisis.
Measures that would mitigate such a
problem afecting the secondary market
would include making any GSE replace-
ment a federal corporation at the least
and allowing such an organization to
have the payroll to recruit top talent with
the skills to price complex risks.
Much is at stake in the latest attempt
to move a GSE reform bill forward before
Congress heads of to campaign. But in
trying to achieve broad-based consensus,
lawmakers may let our chance at trans-
formative change in the mortgage mar-
ket to slip through our grasp.
Cliford Rossi is the Professor-of-the-
Practice at the University of Marylands
Robert H. Smith School of Business and a
principal in Chesapeake Risk Advisors.
How to Judge the Senate Banking
GSE Reform Bill
observation
Clifford Rossi
MBS
rePort
006_ASRMar14 1 2/26/2014 10:29:11 AM
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007_ASRMar14 1 2/24/2014 11:35:36 AM
R
eform of the secondary market
for housing fnance is a big topic
now among think tanks, indus-
try representatives and on Capitol Hill.
Most of this discussion has centered on
the single-family market. Yet Fannie Mae
and Freddie Mac have long played an-
other critical role in our housing market:
providing a secure secondary market for
multifamily housing fnance.
Bills have been introduced in both
the House and the Senate to wind-down
enterprises over a fve-year period and
reduce the direct government role in the
conventional mortgage markets. Both
bills mean to protect taxpayers from
another bailout, buy they have very dif-
ferent end games. Te Senate bill, intro-
duced by Sens. Bob Corker, R-Tenn.,
and Mark Warner, D-Va., would main-
tain a limited government guarantee for
mortgage-backed securities, but only
afer private capital has taken signifcant
frst-loss risk. Te House bill, introduced
by Rep. Jeb Hensarling, R-Texas,would
eliminate any role for the government
other than as a market overseer.
While it is not debatable that the cur-
rent situation is untenable long-term,
disagreement over the end game could
paralyze any attempt to come up with a
solution. However, this would leave the
fnancial system open to what happened
before, and render the housing market
unable to attract the private capital need-
ed to protect the taxpayer from further
risk. It would also lead to the permanent
nationalization of the system. Terefore,
change is needed now, so where do we
start? Multifamily fnance reform, of
course. Tree key facts are important to
understand:
Te multifamily market remained
healthy during the housing bust. Tese
businesses have consistently been proft-
able activities for Fannie Mae and Freddie
Mac because they were designed around
good underwriting and risk-sharing.
Te fnancing and management of
multifamily housing varies greatly from
the model used for single-family hous-
ing, and calls for diferent solutions.
During the crisis, the government-
backed share of single family mortgage
originations peaked above 90% and re-
mains above 80%, according to a pre-
sentation by Beekman Advisors to the
Cleveland Fed. Te multifamily share
is now only 40%, down from the peak of
80%, according to the Mortgage Bank-
ers Association.
Because the multifamily fnancial
markets have performed well for many
years, it is our key goal that they not be
disrupted during the restructuring pe-
riod. Accordingly, our proposal would
do the following:
Spin of the Fannie and Freddie
multifamily operations in phases, ending
with privately owned entities.
Continue the existing successful
risk-sharing multifamily programs as
the successors to Fannie Maes Delegated
Underwriting and Servicing and Freddie
Mac securitizations, where up to 15% of
the frst loss by pool is taken by private
capital. Te programs should continue to
focus on afordable housing.
Place adequate private capital at risk
before a catastrophic guarantee provided
by the government could be accessed.
Maintain a catastrophic govern-
ment guarantee for qualifed multifamily
securities, but make it explicit and paid
for with appropriate guarantee fees.
A government guarantee should
promote counter-cyclicality by increasing
fees or reducing commitments if prices
get out of line with historical trends.
Te successor entities would issue
securitized pools of multifamily mort-
gages, but they would not be permitted
to retain a large portfolio in pursuit of
additional profts.
Allow additional securitizers, in-
cluding a mutual model that could en-
sure that smaller lenders have access to
credit, which could possibly expand the
role of the Federal Home Loan Banks.
Ensure that the entities serving the
multifamily secondary market ofer geo-
graphical coverage, afordability levels
and size of developments.
Fund support for afordable hous-
ing with a portion of the fees paid for se-
curitization and guarantee.
Assess a surcharge on high-end de-
velopments seeking a loan with the cata-
strophic government guarantee.
Give the Federal Housing Finance
Agency the powers to be a strong regula-
tor to oversee multifamily operations.
We understand several members
from both parties of the Senate Banking
Committee are working on a bill that ac-
complishes many of these goals. It is im-
portant to reform our housing fnance
system and better to do it sooner rather
than later.
Shekar Narasimhan is a managing
partner at Beekman Advisors. James B.
Lockhart is vice chairman of WL Ross &
Co. and former director of the FHFA.
Make Multifamily the Starting
Point for Housing Reform
observation
MBS
rePort
008_ASRMar14 2 2/26/2014 10:29:21 AM
M
anagers and arrangers of U.S.
collateral loan obligations have
struggled to satisfy the Euro-
pean Unions risk retention requirement.
However, the fnal draf rules published by
the European Banking Authority (EBA)
at the end of last year include a new con-
cession that may assist U.S. managers in
accessing an investor base in the region.
Te Capital Requirements Regulation
provides that certain European Econom-
ic Area-regulated investors, including
credit institutions and investment frms,
shall be exposed to thee credit risk of cer-
tain securitizations only if the originator,
sponsor or original lender of that secu-
ritization has explicitly disclosed that it
will retain, on an ongoing basis, a mate-
rial net economic interest of at least 5%.
Te only parties to a deal that can satisfy
this requirement are the original lender,
originator or sponsor.
U.S. collateral managers and arrang-
ers have been hard pressed to identify
an entity that is both willing and able to
retain this economic interest. Tis is be-
cause neither the original lenders under
the loans nor the sellers of the loans (be-
ing originators for the purposes of the
relevant defnition) have any interest in
committing to retain 5% of the loans that
they originate or sell. European collateral
managers face the same issue. However,
there is an additional difculty for U.S.
collateral managers: even if they are will-
ing to retain this interest themselves, they
do not qualify as sponsors. Te defnition
of sponsor is limited to credit institu-
tions and certain entities subject to the
requirements of the EU Markets in Fi-
nancial Instruments Directive.
U.S. collateral managers and arrang-
ers have given thought a pos-
sible work-around: identify-
ing an entity that can act as
an originator to acquire the
loans and then sell them on to
the CLO. Tis solution would
rely on a limb of the defnition
of an originator that includes
an entity that purchases a
third partys exposures for its
own account and then securi-
tises them.
Te difculty with this
originator structure is that
reinvestment by the CLO is
dependent upon the on-go-
ing cooperation of the origi-
nator during the life of the
CLO the originator would
need to sell to the CLO not
only the loans contained in
the initial portfolio, but also
all other post-closing loans,
both during and afer the reinvestment
period. Tis rules provide that, where
there are multiple originators, the reten-
tion must be fulflled by each originator
in relation to the proportion of the total
securitized exposures for which it is the
originator. So if a loan were to be ac-
quired other than from the entity iden-
tifed as the originator, the seller of that
loan would constitute a second origina-
tor and would need to hold a share of
the retention.
However, the fnal draf the EBAs
regulatory technical standards (RTS),
published on Dec. 17, introduces a signif-
icant new concession: It provides that the
retention requirement may be fulflled in
full by a single originator, provided that
this originator has established and is
managing the program or securitisation
scheme. Tat means that the
collateral manager can satisfy
the risk retention requirement
so long as it has itself acquired
some of the loans and then,
afer a period of holding them
for its own account, sold them
to the CLO.
It may be sufcient for the
collateral manager to origi-
nate a single loan sold to the
CLO there is no level of
origination required beyond
the requirement that the col-
lateral manager be an origi-
nator. In this case, however,
consideration would need to
be given to the consequences
of default, redemption or
sale of that loan. In addition,
the collateral manager of any
CLO using such a structure
will need to ensure compli-
ance with the Investment Advisers Act
of 1940 (including the rules relating to
client cross-trades and principal trades)
and any U.S. tax guidelines to which the
CLO is subject.
Te fnal draf RTS will not take efect
until it is issued by the European Commis-
sion in the form of an EU regulation. It is
expected, but not certain, that the RTS ad-
opted by the European Commission will be
in the same form as the fnal draf RTS.
Nick Shiren is a partner and Robert Can-
non is an associate in the capital markets
department of the London ofce of Cad-
walader, Wickersham & Taf.
Possible Workaround to
EU Risk Retention for US CLOs
ABS
REPORT
ObsERvaTiOn
Nick Shiren
Robert Cannon
009_ASRMar14 1 2/25/2014 11:53:33 PM
Housing boom-era mortage bonds, written
crisis, are performing better t
10 Asset Securitization Report // March 2014
010_ASRMar14 1 2/26/2014 10:42:40 AM
The ugly pile of Toxic morTgage securiTiesclose-
ly linked to the fnancial crisis in the popular imagination
looks much better now.
When the U.S. housing boom went bust, defaults
surged to unprecedented levels in securitizations minted
from 2005 to 2007.
But their performance has vastly improved thanks to
home price recovery.
Securities are performing better if you measure by
delinquency rates, said frank pallotta, the managing
partner at loan Value group.
The degree of improvement varies depending on other
factors such as geography, borrower credit, fraud or mis-
representation with the original loan, and individual ser-
vicers strategies, he said.
REHAB
housing boom-era morTage bonds, wriTTen
off as Toxic wasTe during The financial
crisis, are performing beTTer Than expecTed
by Bonnie Sinnock
www.StructuredFinanceNews.com // March 2014 11
011_ASRMar14 2 2/26/2014 10:42:57 AM
Home prices rose 10% to 40% in roughly
80% of key U.S. metropolitan markets
from the fourth quarter of 2011 to last
years third quarter, according to a recent
report from Fitch Ratings based on data
from Case-Shiller and LoanPerfor-
mance.
Many of the markets that sufered the
steepest declines during the height of the
crisis have bounced back dramatically.
(See map at right.)
Te rallying housing market has, in
turn, fed into the performance of pri-
vate-label residential mortgage-backed
securities, the Fitch report shows.
To illustrate its point, Fitch studied
delinquency roll ratesthe percentage of
borrowers who were current a year ago
but are now delinquent.
Tis served to measure how home
price changes infuence borrower be-
havior over time. Fitch found that, in
general, the higher the rise in homes
prices, the steeper the drop in the roll
rate, which translates to improving deal
performance.
For instance, the 12-month roll rate
for the period ending in the third quar-
ter of 2013 was 5.92% in regions averag-
ing 40% home price increases from the
fourth quarter of 2011 to the third quar-
ter of 2013.
Tat represents a 47% drop from the
11.08% 12-month roll rate at the end of
the fourth quarter of 2011 for this group
of regions, according to Fitch analysts
Grant Bailey and Sean Nelson, the re-
ports authors.
Regions averaging a 10% rise in home
prices saw roll rates decline by a more
modest 17%, while those with fat home
prices had roll rates drop only 6%.
Dutch Ditch Deals
Taking advantage of boom-era securi-
ties improved performance have been
investors like the Dutch State Treasury,
which proftably sold of the last of the
private-label mortgage bonds it acquired
at a discount when it bailed out INGdur-
ing the worst of the U.S. downturn.
Tere were three auctions beginning
in December of last year and ending in
mid-February. BlackRock Solutions
was responsible for the execution and
sales of the securities. Te sale took place
through a competitive auction process
involving a number of selected broker
dealers.
Te $8.9 billion proceeds were used to
pay of the guaranteed amount to ING in
full. Proceeds in excess of the guaranteed
amount, totaling approximately $1.9 bil-
lion, will be remitted to the Dutch State.
Tis amount is higher than initially ex-
pected in November, when the decision
to proceed with sales was announced.
A wide range of infuential buyers
from international institutions like ING
to U.S. corporate credit unions were
forced to record massive losses on their
books. Actual losses in the billions and
fears that they might soar even higher
brought down several major companies
and led to government bailouts. Among
the grimmer milestones of the crisis was
the U.S. governments rescue of insur-
ance behemoth American International
Group, the collapse of Bear Stearns and
its rushed sale to JP Morgan, and Bank
COVER STORY
of America
Merrill Lynch.
But investors that had the where
withal to hold onto the bonds through
the housing recovery or purchase
them at a fraction of par have ended
up doing better than they once thought
they would.
A recent court approval of a closely
watched $8.5 billion private-label resi
dential mortgage-backed securities set
tlement likely refected, in part, the fact
that litigants had dropped objections giv
en improving [securities] performance
over the last two years as the housing
market has begun to recover, Fitch ana
lysts said in a report early last week.
AIG and some of the other investors
involved in the case subsequently asked
for a delay in the entry of the court deci
sion. AIGs is another example of an in
stitution forced into a government bail
out during the downturn. Te rescue
lef the U.S. with massive RMBS hold
ings that the government was later able
to sell at a proft.
Not-So Eminent Domain
And just as rising home prices might
sap the desire of litigants to pursue these
mortgage-related cases, they might also
reduce incentives for local governments
to use eminent domain to seizing under
water mortgages.
A case in point is Richmond, Cali
fornia, a cause clbre of the eminent-
The pace of home price appreciation is slowing in some regions,
and the window of opportunity for selling legacy RMBS assets
for higher prices may be closing.
FROm GOOD TO GREaT
Home Price increases from tHe fourtH quarter of 2011
to tHe tHird quarter of 2013
Source: caSe Shiller
012_ASRMar14 3 2/25/2014 11:39:47 PM
lion, will be remitted to the Dutch State.
Tis amount is higher than initially ex-
pected in November, when the decision
to proceed with sales was announced.
A wide range of infuential buyers
from international institutions like ING
to U.S. corporate credit unions were
forced to record massive losses on their
books. Actual losses in the billions and
fears that they might soar even higher
brought down several major companies
and led to government bailouts. Among
the grimmer milestones of the crisis was
the U.S. governments rescue of insur-
American International
, the collapse of Bear Stearns and
, and Bank
of Americas purchase of a beleaguered
Merrill Lynch.
But investors that had the where-
withal to hold onto the bonds through
the housing recovery or purchase
them at a fraction of par have ended
up doing better than they once thought
they would.
A recent court approval of a closely
watched $8.5 billion private-label resi-
dential mortgage-backed securities set-
tlement likely refected, in part, the fact
that litigants had dropped objections giv-
en improving [securities] performance
over the last two years as the housing
market has begun to recover, Fitch ana-
lysts said in a report early last week.
AIG and some of the other investors
involved in the case subsequently asked
for a delay in the entry of the court deci-
sion. AIGs is another example of an in-
stitution forced into a government bail-
out during the downturn. Te rescue
lef the U.S. with massive RMBS hold-
ings that the government was later able
to sell at a proft.
Not-So Eminent Domain
And just as rising home prices might
sap the desire of litigants to pursue these
mortgage-related cases, they might also
reduce incentives for local governments
to use eminent domain to seizing under-
water mortgages.
A case in point is Richmond, Cali-
fornia, a cause clbre of the eminent-
domain movement. Te economically-
depressed city of a little over 100,000 has
a proposal devised by Mortgage Resolu-
tion Partners (MRP) to seize 624 mort-
gages that it viewed as troubled.
But the city has yet to follow
through. Structured-finance players
believe that rising home values in the
city will erode support for the plan. In
a court filing against the loan seizure,
investment banker Phillip R. Burna-
man II, on behalf of Wells Fargo, ar-
gued that nearly 31% of the targeted
mortgages have loan-to-value rations
(LTVs) below 100 and 44% have LTVs
above 120. He said that a good number
of the underwater loans should be in
positive equity terrain if home prices
continue rising.
End of the Run?
But even with prices still expected to rise
in place like Richmond, the pace may slow
in some regions, and the window of op-
portunity for selling legacy RMBS assets
for higher prices may be closing, says Dave
Hurt, a vice president at CoreLogic.
Te dollar price of those has gone
up but there is a point of diminishing re-
turn, he says.
But even detoxifying an additional,
small percentage of non-agency RMBS
outstanding is likely to be a signifcant
fgure.
Nearly $2.8 trillion of private la-
bel deals were issued in the three-year
boom period of 2005-2007, according
to date from Vector Securities, a Core-
Logic platform.
Home prices have, on average, wa-
vered in the past month, which may sig-
nal to investors there is limited upside in
unsecuritized and securitized loan port-
folios, Hurt and Pallotta say.
Preliminary indications for January are
that home prices overall dipped 0.8% from
December, according to CoreLogic. Tey
are still higher year-over-year, however.
Deeply Underwater
Tere also remains a contingent of
RMBS loans in some areas in which
home prices have failed to rise enough,
leaving the mortgages substantially un-
derwater, Pallotta says.
Home price improvement may do lit-
tle to help performance if it fails to bring a
loan below the 120% loan-to-value mark,
afer which incentives to walk away from
the home decline signifcantly, says Pal-
lotta, whose company specializes in loan
conversion incentives for underwater
borrowers and others.
Several million borrowers still have
signifcant negative equity above the
120% LTV mark and many of those are
concentrated in agency and private-label
RMBS from the boom years, he notes.
Nearly 6.4 million homes, or 13% of resi-
dential properties with a mortgage, still
had negative equity at the end of the third
quarter of 2013, according to CoreLogic.
COVER STORY
The pace of home price appreciation is slowing in some regions,
and the window of opportunity for selling legacy RMBS assets
for higher prices may be closing.
Source: caSe Shiller
013_ASRMar14 4 2/25/2014 11:39:58 PM
ABS
REPORT
W
hile lawmakers continue to
press regulators to exempt col-
lateralized loan obligations
from Volcker Rule restrictions, managers
of these deals have found another work-
around and this one allows them to in-
vest in bonds.
CLOs that contain any securities are
covered funds, and banks are not per-
mitted to hold ownership interests in
covered funds under the Volcker Rule.
Most CLOs issued before the publi-
cation of the fnal rule in December have
the ability to invest in bonds as well as
loans. And owners of senior debt securi-
ties issued by these CLOs typically have
the right to remove the deals managers
for cause and so could be considered to
have an ownership interest.
To avoid running afoul of Volcker
and putting themselves of limits to
banks, most CLOs issued since the rule
was published restrict themselves to in-
vestments in loans. Tere have also been
discussions about making existing deals
compliant by selling bond holdings or
limiting the noteholders ability to re-
move or replace the manager.
But there is another way to avoid be-
ing classifed as a covered fund: relying
on Rule 3a-7 of the Investment Company
Act of 1940 to avoid registration with
the Securities and Exchange Commis-
sion. Most CLOs are issued under a dif-
ferent exception allowed by Rule 3c-7 of
the Act. (Tis is the same exception used
by many hedge funds and private equity
funds and the reason CLOs got ensnared
in the Volcker Rule.)
Since CLOs issued under Rule 3a-
7 arent covered funds, banks can hold
the senior debt issued by these vehicles,
regardless of their ability to remove the
manager or whether the CLOs hold
bonds or other securities.
Tat sounds simple, but Rule 3a-7
comes with more restrictions than Rule
3c-7. Notably, the rule prohibits invest-
ment vehicles from making trades for the
primary purpose of recognizing gains or
decreasing losses resulting from market
value changes.
Although most CLOs are actively
managed, recognizing gains or avoiding
losses isnt necessarily the primary reason
that managers buy or sell assets. Man-
agers also make trades to comply with
various covenants and compliance tests;
these trades improve or adjust a deals
rating profle, diversity score, weighted
average life or maturity profle.
And theres plenty of precedent for
using the 3a-7 exemption. Weve seen
a lot of the balance sheet deals involv-
ing middle-market loans that have his-
torically been 3a-7 compliant, and some
managed broadly syndicated transactions
that have as well, said John Timperio, a
partner at the law frm Dechert.
In a February report, Wells Fargo
analysts listed a number of legacy CLO
1.0 deals that appear to have been issued
under Rule 3a-7, from managers such
as Silvermine Capital Management,
Highland Capital Management and
GSO/Blackstone Debt Funds Manage-
ment.
Timperio says that existing CLOs
could theoretically change their status
from 3c-7 to 3a-7 with an amendment,
though the ability to do so varies from
deal to deal. He believes its more likely
that well see Volcker-related use of the 3a-
7 exemption among new CLOs, however.
In the past its been driven by the
manager wanting to rely on 3a-7 for its
own internal reasons, Timpero said.
Another Volcker Rule Work-
around for CLOs
Te diference here is youll have man
agers setting them up in this fashion due
to constraints around the noteholders.
Because of that diference, youll prob
ably see some protective provisions for
the investors worked into this new group
of 3a-7 deals.
In other words, even if a manager
issues a deal under the 3a-7 exemption,
unless there is wording to guarantee that
the managers future trading activity
wont put the deal at risk of Volcker non
compliance, these banks may balk.
Some banks are conservative and
worried, so they may be hesitant to rely
solely on the 3a-7 exemption, said Wells
Fargo CLO analyst
bank investors point of view, the concern
is that the manager could do something to
push the deal out of Volcker compliance.
So a lot of banks are looking at it like belt
and suspendersin other words, it may
not be enough but it might help.
Indeed, at least one recently market
ed U.S. CLO that was issued under Rule
3a7the $746.04 Madison Park Fund
ing XIII managed by
Management
vestments, according to a presale report
by Fitch Ratings.
Te transaction documents for the
deal state that it will not invest in bonds
or other securities unless none of the
senior securities issued by the deal are
considered to be an ownership interest
under Volcker or it is exempt from regis
tration under the Investment Company
Act by Rule 3a-7.
A representative from CSAM de
clined to comment.
Preston believes that 3a-7 deals may
become a preferable option for European
CLOs. Tats because the limited supply
of European corporate loans makes bond
allocations more valuable for these deals.
Te size of Europes loan market may also
limit managers ability to conduct trades
that might put deals in confict with the
rule. Carol J. Clouse
COVeRed FundS
exposure to non-loan assets for Clos issued post finanCial Crisis
SOuRcE: STandaRd & POORS 2014
014_ASRMar14 1 2/25/2014 11:40:17 PM
torically been 3a-7 compliant, and some
managed broadly syndicated transactions
John Timperio, a
.
Wells Fargo
analysts listed a number of legacy CLO
1.0 deals that appear to have been issued
under Rule 3a-7, from managers such
Silvermine Capital Management,
Highland Capital Management and
GSO/Blackstone Debt Funds Manage-
Timperio says that existing CLOs
could theoretically change their status
from 3c-7 to 3a-7 with an amendment,
though the ability to do so varies from
deal to deal. He believes its more likely
that well see Volcker-related use of the 3a-
7 exemption among new CLOs, however.
In the past its been driven by the
manager wanting to rely on 3a-7 for its
own internal reasons, Timpero said.
Te diference here is youll have man-
agers setting them up in this fashion due
to constraints around the noteholders.
Because of that diference, youll prob-
ably see some protective provisions for
the investors worked into this new group
of 3a-7 deals.
In other words, even if a manager
issues a deal under the 3a-7 exemption,
unless there is wording to guarantee that
the managers future trading activity
wont put the deal at risk of Volcker non-
compliance, these banks may balk.
Some banks are conservative and
worried, so they may be hesitant to rely
solely on the 3a-7 exemption, said Wells
Fargo CLO analyst Dave Preston. From a
bank investors point of view, the concern
is that the manager could do something to
push the deal out of Volcker compliance.
So a lot of banks are looking at it like belt
and suspendersin other words, it may
not be enough but it might help.
Indeed, at least one recently market-
ed U.S. CLO that was issued under Rule
3a7the $746.04 Madison Park Fund-
ing XIII managed by Credit Suisse Asset
Managementalso eschews bond in-
vestments, according to a presale report
by Fitch Ratings.
Te transaction documents for the
deal state that it will not invest in bonds
or other securities unless none of the
senior securities issued by the deal are
considered to be an ownership interest
under Volcker or it is exempt from regis-
tration under the Investment Company
Act by Rule 3a-7.
A representative from CSAM de-
clined to comment.
Preston believes that 3a-7 deals may
become a preferable option for European
CLOs. Tats because the limited supply
of European corporate loans makes bond
allocations more valuable for these deals.
Te size of Europes loan market may also
limit managers ability to conduct trades
that might put deals in confict with the
rule. Carol J. Clouse
ABS
REPORT
POORS 2014
The strong growth in U.S. CLO issuance last year didnt do much to
shake up manager league tables, in part because so many deals came
from new entrants.
But there was some churn in the top ranks.
Moodys Investors Service, in its January issue of CLOInterest, reports the
top 10 rankings in the US, Europe and globally have changed very little since
2012, with CIFC and GSO/Blackstone in the U.S. and Alcentra in Europe re-
maining the pacesetters for managers of publicly rated CLOs.
In the U.S., CIFC topped the rankings in terms of deal numbers with 29,
edging out GSO/Blackstone with 28 and fast-moving Carlyle with 25. Highland
Capital Management was frst among managers based on dollar volume, with
$12 billion of assets under management, to edge out CIFC at $11.5 billion.
Ares Management, number four on the list of U.S. CLO managers by deals
with 23, edged out Credit Suisse Asset Management (CSAM), which had 21. Ares
also claimed the top spot on the league table for CLO 2.0 deals, or those
since the fnancial crisis. The six it closed on last year brought its total to 10.
In Europe, where CLOs rated by Moodys dropped by 10 billion due to re-
demptions, the CLO tables were again headed by Alcentra, last years leader,
in both deal count (12) and by assets under management (4.1 billion).
Carlyle rose to the number three spot in the U.S. league tables from the
number fve spot in 2012 (when it managed 24 deals).
This was in contrast to its slide to the number three spot on the Euro-
pean CLO league table from number two in 2012. It fell behind GSO/Black-
stone, which had 11 deals under management in 2013, moving it up to the
number two spot.
Three top 10 U.S. frms from 2012 Invesco, Alcentra and Kohlberg Kravis
Robertswere pushed out of the rankings this year by ING, which fnished
number 10 in both number deals table and for value of assets under manage-
ment (Invesco and Alcentra had tied for 10th in total deals in 2012, and KKR
claimed the 10th highest volume of assets).
Moodys report listed GSO/Blackstone as the global CLO manager league
table kingpin with 39 total deals amounting to $14.8 billion in assets under
management, which was ahead of Carlyles 34 deals totalling $14.5 billion
under management.
The report also highlights the growth in the number of CLO managers last
year, when 18 frms launched their inaugural deals.
While none of these newcomers make it to the top of the league tables,
they account for 14.6% of managed CLOs that Moodys rated in 2012 and
2013, and offset a record redemption rate by helping grow the volume of
outstanding CLOs to $278 billion from $268 billion in 2012.
The most active managers in the U.S. market last year were Ares and CIFC,
each of which closed on six CLOs totaling around $3 billions. GSO/Blackstone
and Oak Hill had fve apiece, with four apiece for Carlyle, CVC/Apidos, MJX
and Octagonthe latter two being newcomers to the CLO 2.0 league tables
list.
Last year in the U.S., in fact, 81 managers issued new CLOs, up from 56 in
2012, according to Moodys, with more than half of those managers issuing
Despite Surge, Little Change in CLO
Manager Ranks
015_ASRMar14 2 2/25/2014 11:40:10 PM
B
y halting Ocwen Financials
deal to buy a mortgage servicing
portfolio from Wells Fargo, New
York regulator Benjamin Lawsky has
called into question the servicers ambi-
tious growth plans.
Lawskys move also raises a broader
question of whether there are enough
other servicers to take on the nearly $1
trillion in servicing of delinquent loans
that banks are expected to sell in the next
few years.
Ocwen has been telling analysts that
it expected to acquire about $400 bil-
lion in additional servicing rights in the
next 12 to 18 months. Te Atlanta-based
mortgage servicer has said it expects to
win its fair share of delinquent servic-
ing portfolios.
But Ocwens strategy is now being
upended by Lawsky, the superintendent
of New Yorks Department of Financial
Services. Ocwen said last week that at
the request of Lawskys agency it put an
indefnite hold on the $2.7 billion pur-
chase from Wells. Te regulator is specif-
ically concerned about Ocwens servicing
portfolio growth, the company said. He
has jurisdiction because of Ocwens New
York banking charter.
Its clear the government is putting
itself squarely in front of the ability of
Ocwen to grow its business, says Dick
Bove, the longtime banking analyst and
vice president of equity research at Raf-
ferty Capital Markets.
Ocwen did not return calls or emails
seeking comment for this story.
Broadly, regulators are driving big
banks out of the servicing business with
stringent capital rules, says Jeff Lewis,
a senior portfolio manager at the hedge
fund TIG Advisors. Te Basel III rules
will require banks to increase the amount
of capital they hold against mortgage
servicing rights, motivating banks to sell
their portfolios.
But at the same time, there are few
large servicers with the ability to handle
such a large number of delinquent loans.
Te banks are sent the message that
they should not have servicing as an as-
set, so if they have to put so much capital
against it, its a poor return on their mon-
ey, says Lewis. So the nonbanks have
taken a huge amount of market share and
they dont have a lot of capital. Im not
sure what the solution is once you have
that dynamic in place.
He adds, Tis is the problem you
get when you have this patchwork of
regulation and everybody is doing their
own thing and theres no comprehensive
approach.
Ocwen has grown quickly. Since
2012, it has acquired the servicing rights
on more than $325 billion of loans, in-
cluding the acquisition of Litton Loan
Servicing from Goldman Sachs, Home-
ward Residential Holdings from Wilbur
L. Ross, and the home loan servicing
rights of Ally Financial.
Te company has long maintained it
has the capacity to handle more servicing
and analysts have never questioned its
ability to take on more delinquent loans,
says Dave Stephens, the chief operat-
ing ofcer at United Capital Markets, a
Greenwood Village, Colo., mortgage ser-
vicing consultant.
Teyve been aggressively making
plans for a lot more acquisitions, so how is
this suddenly a problem? Stephens says.
Analysts have asked only if there is enough
servicing for Ocwen to buy and keep the
growth going for years. It has always been
implied that they had tons of capacity.
However, on a conference call in
October, analysts did bombard Ocwen
CEO and President Ronald Faris with
questions about delays in integrating two
separate servicing acquisitions from Ally
Financial and OneWest.
Faris replied that the approval process
for the sale of servicing rights to loans
backed by Fannie Mae and Freddie Mac
was much faster than for nonagency ser-
vicing. I think that the process that the
various consenting parties in Ocwen and
the seller went through bodes well for fu-
ture transactions, Faris said. Its difcult
to predict what a future transaction will
look like. But I think the process that we
went through here, although it took time,
was productive and will actually be help-
ful in the future.
Lawsky may not believe that Ocwen
has lived up to its $2.1 billion settle-
ment in December with the Consumer
Financial Protection Bureau, 49 state
attorneys general and the District of Co-
lumbia, says Bove. Tat deal requires that
Ocwen provide $2 billion in principal for-
giveness to modify loans to underwriting
borrowers and $125 million in refunds to
up to 185,000 customers who lost their
homes to foreclosure from 2009 to 2012.
Kate Berry, American Banker
Tough Questions for Ocwen
Theyve been aggressively making plans for a lot
more acquisitions ... it has always been implied
that they had tons of capacity.
MBS
REPORT
016_ASRMar14 1 2/25/2014 11:40:16 PM
009_ASRFeb14 2 1/29/2014 2:18:53 PM
T
he turmoil in emerging markets
isnt a re-run of the Asian and
Russian Crises of the late 90s,
which led to fnancial havoc and steep
recessions in various countries.
It is true that countries including Ar-
gentina, India, Russia, South Africa and
Turkey have sufered sharp losses to their
currencies as the U.S. Federal Reserve
tapers its massive stimulus program,
resulting in an abrupt switch in capital
fows away from the developing world.
Part of the turbulence in Tur-
key and Tailand, notably also has a
strong political accent, but in general the
emerging market world is fnancially in a
stronger place than in the late 90s. Most
governments have much higher reserves
than they did back then, should they
have to defend their currencies. In addi-
tion, foreign lending is a smaller share of
the total in many of these countries, par-
ticularly in Asia.
Whats happened is that the emerg-
ing economies have become their own
standing market, said Erick Hernan-
dez, director of Latin America origina-
tion and structuring at Alsis Funds.
Indeed, by all counts, the ratio of lo-
cal-currency to foreign-currency fund-
ing in the universe of emerging market
fxed income has exploded since the 90s.
Nonetheless there are still going to
be correlations between what happens
within these regions and the U.S. and
Europe, he said.
Currency weakness still has not hurt
the performance of securitization deals.
When we analyze the credit perfor-
mance on many of the securitized assets
that we have seen in these markets and the
recent market volatility, there is no evi-
dence of immediate correlation explains
Juan De Mollein, lead analytical manager
for emerging markets structured fnance
at Standard & Poors. Tat is why you
have not seen, at least at the moment, the
level of impact in the credit conditions as
seen in other past crises.
De Mollein was speaking about the
emerging markets of South Africa, Rus-
sia and Turkey, but the story is similar for
the Latin American markets.
Eric Gretch, senior director of
emerging markets on S&Ps structured f-
nance ratings team, points out that today
several Latin American countries have
investment grade ratings. In compari-
son, in the late 1990s and early 2000s,
most were non-investment grade. In
many instances, you now have countries
in Latin America with deeper domestic
capital markets, whereby borrowers are
able to access relatively cheaper funding,
said Gretch. Tey are no longer as de-
pendent on cross-border fnancing.
Tis holds as true for securitiza-
tion as debt funding in general in Latin
America.
Gretch said that in the Latin Ameri-
can structured fnance market, there is
less concern with short-term global in-
terest rate movements and external mar-
ket factors.
Russia, for example, introduced a
securitization law in December that
will faciliate the issue of non-RMBS se-
curitizations. The law will potentially
open up the domestic market for asset-
backed securities by creating local spe-
cial purpose vehicles with a stronger
legal underpinning.
Ruble Takes Over
While the legal framework for asset-
backed securities has yet to be imple-
mented, issuance of Russian RMBS rated
Why SF is Holding Up in
Emerging Markets
by Moodys Investors Service
a record of nearly RUB100 billion ($2.9
billion) last year. Te market has far sur
passed the previous peak of RUB40 bil
lion in 2008.
In a report, Moodys forecast RMBS
issuance of between RUB100 billion and
RUB110 billion this year, with several is
suers making a debut appearance.
In an extreme example of what has
been happening throughout EM, all of
Russias mortgage securitization since
2009 has been domestic. Tis, from a
market that pre-crisis was growing quite
quickly on the cross-border front and
was even joined by other assets such as
car and consumer loans.
Russia has already seen one securiti
zation issued this year (CISC Mortgage
Agent VTB BM1, totaling RUB 23.36 bil
lion) and there are at least two or three
more transactions due out by the spring.
Moodys expects state-owned agen
cies AHML and Vnesheconombank
(VEB) to remain deep-pocketed buyers
of RMBS. Te former also an issuer
has confrmed its annual repurchase
program of RUB40 billion while VEB has
about RUB66 billion lef for its RMBS
DOMEST
Latam Structured Finance
HOMEgROWn HEFT
For em FirmS & countrieS, LocaL currency debt outStripS uS$ debt
Source: aShmore inveStment management ltd
gLOBAL
rePort
018_ASRMar14 1 2/26/2014 11:09:14 AM
for emerging markets structured fnance
s. Tat is why you
have not seen, at least at the moment, the
level of impact in the credit conditions as
De Mollein was speaking about the
emerging markets of South Africa, Rus-
sia and Turkey, but the story is similar for
, senior director of
emerging markets on S&Ps structured f-
nance ratings team, points out that today
several Latin American countries have
investment grade ratings. In compari-
son, in the late 1990s and early 2000s,
most were non-investment grade. In
many instances, you now have countries
in Latin America with deeper domestic
capital markets, whereby borrowers are
able to access relatively cheaper funding,
said Gretch. Tey are no longer as de-
pendent on cross-border fnancing.
Tis holds as true for securitiza-
tion as debt funding in general in Latin
Gretch said that in the Latin Ameri-
can structured fnance market, there is
less concern with short-term global in-
terest rate movements and external mar-
Russia, for example, introduced a
securitization law in December that
will faciliate the issue of non-RMBS se-
curitizations. The law will potentially
open up the domestic market for asset-
backed securities by creating local spe-
cial purpose vehicles with a stronger
While the legal framework for asset-
backed securities has yet to be imple-
mented, issuance of Russian RMBS rated
by Moodys Investors Service reached
a record of nearly RUB100 billion ($2.9
billion) last year. Te market has far sur-
passed the previous peak of RUB40 bil-
lion in 2008.
In a report, Moodys forecast RMBS
issuance of between RUB100 billion and
RUB110 billion this year, with several is-
suers making a debut appearance.
In an extreme example of what has
been happening throughout EM, all of
Russias mortgage securitization since
2009 has been domestic. Tis, from a
market that pre-crisis was growing quite
quickly on the cross-border front and
was even joined by other assets such as
car and consumer loans.
Russia has already seen one securiti-
zation issued this year (CISC Mortgage
Agent VTB BM1, totaling RUB 23.36 bil-
lion) and there are at least two or three
more transactions due out by the spring.
Moodys expects state-owned agen-
cies AHML and Vnesheconombank
(VEB) to remain deep-pocketed buyers
of RMBS. Te former also an issuer
has confrmed its annual repurchase
program of RUB40 billion while VEB has
about RUB66 billion lef for its RMBS
investment program, which is slated to
wind down this year. Moodys anticipates
more demand from private-sector in-
vestors as well, which might help ofset
VEBs exit.
On the consumer side, the agency
said it expected new ABS transactions in
2014, which will use either the quasi-do-
mestic structure or Russias new securiti-
zation law.
In November 2013, Moodys rated the
frst Russian ABS transaction since the
crisis, the RUB 5 billion HC Finance LLC,
originated by Home Credit & Finance
Bank. Te deal is the frst ruble-denomi-
nated Russian consumer loan ABS deal
issued in Russia. Te agency said in the
report that the successful launch of the
frst Russian domestic ABS deal may en-
courage further ABS issuance.
Despite the fragile Russian economy
and a decline in portfolio quality, Moodys
expects that the portion of past-due loans
will remain stable this year. Te agency
also pointed to a fundamental strength
of Russian collateral: the local MBS law
prohibits LTVs of over 80%.
But further down the road, weak-
er economic conditions could pose
risks to the sectors stable performance,
Moodys said. And there is the potential
for contamination of RMBSs credit rat-
ings via counterparties the agency has
had the Russian banking system on nega-
tive outlook since October 2011.
Despite substantial growth since ear-
ly 2010, the total outstanding mortgages
in Russia remain a paltry 3.2% of GDP. In
developed countries, its typically much
higher, with the fgure at 65% of GDP
in the U.S. and a 100% among the mort-
gage-loving Danes and Dutch.
Turkish DPRs Resilient
Macro issues havent immediately under-
mined the performance of Turkish secu-
ritizations either.
Turkey doesnt have a large domes-
tic securitization market. Te main asset
class that has been securitized are diver-
sifed payment rights (DPRs), which have
been entirely issued on the cross-border
front. A DPR transaction is a future fow
asset class consisting of all the electronic
money that fows through a bank, such as
export payments and remittances from
nationals living abroad.
Tis asset class tends to be resilient
to volatile times because these specifc
funds fowing through the fnancial sys-
tem beneft from ofshore cash trapping
mechanisms, are relatively stable and le-
gally isolated from the issuers of the se-
curitizations, said De Mollein.
In addition, export growth and
relatively low issuance since 2009 has
boosted the debt-service-coverage ratio
of Turkeys DPR transactions. DSCR is a
key metric for DPR deals, measuring the
tested collections against the remaining
debt service amount on any given pay-
ment date. In a recent report, Moodys
said, for its six rated Turkish DPR deals,
the DSCR was 88 mid last year, from 80
in June 2012. Tis degree of coverage in-
dicates that fows could fall precipitously
and debt payments would still easily be
met. NC
DOMESTic DOMinancE
Latam Structured Finance iSSuance LocaL vS. Foreign iSSuance
Source: fitch ratingS
GLOBaL
rePort
019_ASRMar14 2 2/26/2014 11:09:04 AM
ABS
REPORT
D
an Feshbach, founder and CEO
of MeasureOne, thinks that dis-
closure of loan-level data can do
for the student loan market what it did
for mortgages.
Feshbach should know; he founded
LoanPerformance (now a subsidiary of
First American Corp.), which became a
conduit for mortgage lenders that were
reluctant to crack the tape, and make
this data available to investors. Providing
it helped to create a market for private la-
bel mortgage securities.
MeasureOne has enlisted lenders
and issuers of private student loans to
contribute to a deal-level database; it is
now enlisting contributors for a loan-
level database.
Te $63 billion of private student
loans outstanding represent around 6%
of the $600 billion-plus overall student
loan market, which is dominated by fed-
erally guaranteed loans. Still, a number of
whole loan portfolios have traded in the
past year as investors cut their teeth on
analyzing these deals. One transaction
that MeasureOne worked on attracted
interest from 40 diferent investors and
six investment banks.
ASR: Do you see the same potential for
the student loan market that you saw for
the mortgage market when you founded
LoanPerformance?
Feshbach: I do, though the potential
is diferent. And Im not alone. Before
we started MeasureOne, we were ap-
proached by several clients who asked
us: Can you do something, like Loan-
Performance, in the student loan space?
Although there are signifcant diferenc-
es between mortgages and student loans,
to some degree, they are more similar
than other types of consumer credit. For
example, these loans have longer lives
than credit card and auto loans. Tey
ofen involve whole families, not just in-
dividuals, and there are both public and
private lenders involved.
Getting into this marketplace has
been challenging. Weve spent three
years getting to know
investors, lenders, and
issuers here.
To enlist them in
our student loan da-
tabase, and get them
to provide the data we
need to build-out col-
laborative databases,
weve had to show
them whats in it for
them. But lenders and
issuers, at least in the
private sector, are com-
ing to see the advan-
tages. One investment
banker recently told
me that our deal-level
data is the first standardized data on
the student loan industry he has ever
seen. Having standardized data he be-
lieves it could significantly increase the
speed of analysis and therefore number
of deals that traders and bankers can
review and bid on. So this would sub-
stantially increase their productivity
and ability to transact.
Te deal-level data is our frst stan-
dardized database, and its available to-
day. Te next step will be loan-level se-
curities data. We are not there yet but
we do have two participants contribut-
ing: Goal Financial and South Caro-
lina Student Loans.
To get to the next level, issuers have
get comfortable they can use this data
to expand participants in the market,
increase their rating levels, and improve
pricing and liquidity.
But the declining volume of student
loan securitization has taken its toll on
the investor and dealer communities.
And this has slowed the learning pro-
cess. Today, there are fewer stafers on
Wall Street devoted to this asset class,
even though it is now the third-largest
class. Similarly, inves-
tors have never had
deep benches of ana-
lysts or traders [for stu-
dent loans].
Today, if you want
to analyze individual
deals, you have to go to
each issuers website,
download remittance
reports or use limited
data available through
Bloomberg, Intex and
Yieldbook, etc. Or you
can get easy access to
standardized deal-lev-
el (and eventually loan
level) data through us.
If nothing else, the growing direct-
lending federal portfolio will make this
more critical. Afer all, how long can the
government continue to originate $100
billion dollars in new loans a year with-
out any securitization?
Did you have the same challenge in the
mortgage market?
Feshbach: When we started the
LoanPerformance database 25 years ago,
a lot of people wondered why even build
a database on mortgages, when delin-
quencies were so low and foreclosures
so rare? But over time, they realized that
our data was giving them early warnings
on performance issues in niche parts of
the market, like IOs [interest only] and
pay-option-ARMs. Also, it could be used
to create new products, to modify loans
and to benchmark your performance
against other lenders.
In the student loan market, we see
Cracking the Tape on SLABS
these same issues and opportunities. In
terestingly, the dynamics of who is mak
ing the riskier loans is reversed in the
student loan market vs. the mortgage
market. In the mortgage market, the pri
vate sector was the driving force behind
subprime loans, and the government
lending
pretty tight, at least initially. It eventually
loosened to respond to what was hap
pening in the non-agency market and
government pressure to meet afordable
housing goals
Te situation is just the reverse in
student lending. Our recent Private Stu
dent Loan Performance Report shows
that private student loans are perform
ing signifcantly better than those origi
nated through government programs.
Tats because private lenders have
stricter underwriting and are assessing
ability to repay.
Obviously, government programs
have a diferent mission, and its not
our place to comment on that; except to
note the performance is much diferent.
Right now seriously delinquent rates
(borrowers three payments behind) are
running at 3% in the private market
according the recent MeasureOne Per
formance Report vs. nearly 21% in the
total market, according to a
Federal Reserve
tor is only 6% of the total market so its
not the a factor in deteriorating student
loan performance .
How big is the student loan market? Isnt it
much smaller than the mortgage market?
Feshbach:
ket is big: Its recently passed the $1.2
trillion mark, putting it ahead of credit
cards and making it the third largest debt
market, afer treasuries and mortgages.
Te student loan market is really two
markets: a very small private market of
approximately $90 billion and a federal
market of $1.1 trillion. When subprime
mortgages hit $1 trillion, demand for our
Dan Feshbach
020_ASRMar14 1 2/26/2014 11:14:49 AM
the investor and dealer communities.
And this has slowed the learning pro-
cess. Today, there are fewer stafers on
Wall Street devoted to this asset class,
even though it is now the third-largest
class. Similarly, inves-
tors have never had
deep benches of ana-
lysts or traders [for stu-
Today, if you want
to analyze individual
deals, you have to go to
each issuers website,
download remittance
reports or use limited
data available through
Intex and
, etc. Or you
can get easy access to
standardized deal-lev-
el (and eventually loan
level) data through us.
If nothing else, the growing direct-
lending federal portfolio will make this
more critical. Afer all, how long can the
government continue to originate $100
billion dollars in new loans a year with-
Did you have the same challenge in the
When we started the
LoanPerformance database 25 years ago,
a lot of people wondered why even build
a database on mortgages, when delin-
quencies were so low and foreclosures
so rare? But over time, they realized that
our data was giving them early warnings
on performance issues in niche parts of
the market, like IOs [interest only] and
pay-option-ARMs. Also, it could be used
to create new products, to modify loans
and to benchmark your performance
In the student loan market, we see
Cracking the Tape on SLABS
these same issues and opportunities. In-
terestingly, the dynamics of who is mak-
ing the riskier loans is reversed in the
student loan market vs. the mortgage
market. In the mortgage market, the pri-
vate sector was the driving force behind
subprime loans, and the government
lending by Fannie and Freddie was
pretty tight, at least initially. It eventually
loosened to respond to what was hap-
pening in the non-agency market and
government pressure to meet afordable
housing goals
Te situation is just the reverse in
student lending. Our recent Private Stu-
dent Loan Performance Report shows
that private student loans are perform-
ing signifcantly better than those origi-
nated through government programs.
Tats because private lenders have
stricter underwriting and are assessing
ability to repay.
Obviously, government programs
have a diferent mission, and its not
our place to comment on that; except to
note the performance is much diferent.
Right now seriously delinquent rates
(borrowers three payments behind) are
running at 3% in the private market
according the recent MeasureOne Per-
formance Report vs. nearly 21% in the
total market, according to a New York
Federal Reserve study. Te private sec-
tor is only 6% of the total market so its
not the a factor in deteriorating student
loan performance .
How big is the student loan market? Isnt it
much smaller than the mortgage market?
Feshbach: Te student loan mar-
ket is big: Its recently passed the $1.2
trillion mark, putting it ahead of credit
cards and making it the third largest debt
market, afer treasuries and mortgages.
Te student loan market is really two
markets: a very small private market of
approximately $90 billion and a federal
market of $1.1 trillion. When subprime
mortgages hit $1 trillion, demand for our
service [LoanPerformance] grew. As an
information company we attracted more
customers as the market grew because we
were providing information to help make
investment decisions whether short or
long specifc securities or sectors.
In this one, [we have a] slightly dif-
ferent role. First, we need to educate the
market on the value of better data and
what all the counter parties can do with
it. Prior to our frst report in December,
and the release of our securities database
in January, there was only minimal data
available to the private student loan mar-
ket. Te government provides even less
[information about federally guaranteed
loans].
In the mortgage market, a couple of
companies Prudential Home Mort-
gage, now part of Wells Fargo, and Resi-
dential Funding Corp. were pioneers
in making data available to investors
and it helped them create a market for
their private label securities. Other is-
suers wanted to follow their lead but not
all frms wanted to crack the tape and
build the analytical and reporting capa-
bilities. So LoanPerformance flled that
role: we became a conduit for industry
loan-level and securities data.
I can see MeasureOne playing a simi-
lar role in this market.
Its understandable that investors would
want loan-level data about private stu-
dent loans, but why would they need it for
federal student loans if the principal and
interest payments are guaranteed, or at
least 97% guaranteed?
Feshbach: True, your risks are
capped, but you still have real issues with
the timing of cash fows. Depending on
what bond you hold it could be signif-
cant. Youre not going to lose money, but
have opportunity cost. Id be surprised
if anyone has good projections on cash
fows on FFELP [Federal Family Educa-
tion Loan program] paper. Estimating
the percentage of borrowers going into
forbearance or deferment is difcult.
Tats why loan-level data is so critical
to making much better projections. In
an ideal world, just like mortgages, you
could look at the student loans associ-
ated with any securitization. Tis would
be accessible to investors in those deals.
How does Reg AB afect student loan
backed securities?
Feshbach: Reg AB II doesnt apply to
past securitizations, and FFELP-based
securities have limited disclosures.
Some municipal issuers such as New
Jersey do not publish remittance re-
ports as surprising as that might seem
in this post Dodd Frank world. Theres
a regulatory debate as to whether there
should be loan level or rep line level,
in other words, summary data where
you take a number of loans with simi-
lar characteristics and group them to
create a sort of synthetic loan.
On one side, there are issuers who are
concerned that investors dont have the
capabilities to analyze loan level data. On
the other side, there are investors whove
worked in the mortgage market and ex-
pect to work with very large quantities
of data. Tey have plenty of computing
power to analyze student loan portfolios
or securitizations.
A lot of whole loan student loan port-
folios have traded in the last year. Inves-
tors have cut their teeth on these deals
and proven they have the analytical skills
to evaluate portfolios and build model-
ing tools.
Weve also made our tools available
to investors bidding on those assets. Its
not a very big market, whole loans trades,
but enough are done today that theres a
large base of investors able to work with
loan level data.
One private student loan transaction
we worked on had 40 diferent investors
and six investment banks were looking at
the pool, though not all of them bid. Tis
was in early fall of last year. AB
ABS
REPORT
021_ASRMar14 2 2/26/2014 11:14:34 AM
A
trend of fewer homeowners re-
fnancing their mortgages as
interest rates climb is helping to
curb sales of home-loan bonds without
government backing. Its also making
new notes being issued safer, according
to Moodys Investors Service.
Mortgages used to buy homes his-
torically default less than replacement
loans, partly because of the greater vig-
or employed by lenders in underwrit-
ing the frst category of debt, the rat-
ings frm said in Feb. 19 a report. Te
dynamic is benefcial for investors as
higher rates reduce how many consum-
ers can beneft by refnancing, boosting
the share of purchase loans in pools
backing nonagency bonds.
Its a very clear trend weve seen,
said Kruti Muni, an analyst at Moodys
who worked on the report, which ad-
dressed the quality of securities tied to
jumbo mortgages, the only type now
being packaged into nonagency bonds.
A slowing of the Federal Reserves
debt buying and an improving economy
has driven the average rate on typical
30-year mortgages to 4.5% from a re-
cord low 3.47% in December 2012, ac-
cording to Mortgage Bankers Associa-
tion data. A slump in new loan volumes
caused by the drop in refnancing is
curbing nonagency issuance, along with
banks demand for loans for their bal-
ance sheets and bond investors desire
for higher yields afer record defaults.
Fewer refnance mortgages should
be a credit positive for new jumbo-
mortgage bonds, according to Moodys.
Te average share of purchase loans in
deals by Redwood Trust , the most ac-
tive issuer since the market restarted
in 2010, rose to 54% in the second half
of 2013, from 26% in the previous six
months, according to the report.
While purchase mortgages are gen-
erally given to borrowers with higher
credit scores, that doesnt fully explain
their better historical performance,
Moodys said. Lenders also have typi-
cally subjected purchase obligors to
more stringent credit reviews and prop-
erty valuations since purchase borrow-
ers have no history of residing in the
home, the frm said in its report.
Mezz Spreads to Drive CLO Refs
U.S. collateralized loan obligations are
likely to see their reinvestment periods
extended this year as deals roll into new
transactions afer being called in full,
according to Barclays.
Typically, holders of the junior most
CLO securities, known as the equity
holders, have the right to call a deal af-
ter two years and will do so by essen-
tially repricing the deal if debt fnancing
levels are more favorable than when the
deal originally priced.
Te impetus for calling CLOs nor-
mally comes from spread tightening
on the senior, triple-A rated tranches.
Tese are the largest tranches of deals,
typically representing 60% of the capital
structure, and in some cases they are the
only class that can be called.
And while many deals issued in
2012 are approaching the end of their
non-call periods, spreads on the triple-
A tranches of newly priced deals are es-
sentially unchanged from 2012 levels.
Instead, the incentive comes from
spread compression on mezzanine
tranches, both the triple-B and double-
Bs. Spreads on the mezzanine tranches
of new deals are 100 basis points tighter,
on average, than they were in 2012.
As a result, the weighted average cost
of liabilities is almost 15 basis points
lower. Tis could lead many more deals
to be called than when looking at triple-
A spreads alone, according to Barclays.
Te market implication when deals
are called in full is that their reinvest-
ment periods are likely to be extended if
they are rolled into a new transaction,
analysts stated in a Feb. 21 report. Tis
should be a slight positive for the mar-
ket, since one-quarter of the 2012 deals
had a reinvestment period of only three
years, whereas 2013 and 2014 deals have
extended that period to at least four
years. However, if only the mezzanine
notes were re-priced, the efect would be
more muted.
Ocwen Sells Notes Tied to
Servicing Fees
Ocwen Financial has found a new way
to fund its rapid expansion in mortgage
servicing: issuing notes tied to the fees
that it earns from managing govern-
ment-backed loans.
Te $123.5 million of notes do not
amortize, making only interest pay-
ments for 14 years. Monthly payments
will be calculated as 0.21% of the prin-
cipal balance of a pool of mortgages,
according to a person familiar with the
transaction. Te initial balance is ap-
proximately $11.8 billion. So if some of
the mortgages are paid of, reducing the
servicing fees Ocwen earns, investors
will receive a commensurately smaller
amount of interest.
Based upon expected prepayments
the cash fows from interest payments
would produce a 10% yield. Barclays
and Morgan Stanley are joint leads.
Waning Mortgage Refs Make
New Deals Safer
MBS
REPORT
022_ASRMar14 3 2/26/2014 11:14:35 AM
G
eorge Canellos, the SECs former
co-director of enforcement, has
joined Milbank, Tweed, Hadley
& McCloy as global head of the litigation
department.
C a n e l l o s
has worked for
the law firm
before. He
will start his
new position
at Milbank in
mid-March.
C a n e l l o s
joined the Se-
curities and Ex-
change Com-
mission as a
director in New York, the largest of the
agencys dozen feld ofces. He became
a co-head of enforcement in 2012.
Earlier this month the SEC said
that, among his accomplishments,
Canellos had supervised legal actions
against JP Morgan Securities, Credit
Suisse Securities, RBS Securities
and Bank of America for mislead-
ing investors in selling residential
mortage-backed securities. So far
these cases have resulted in $570 mil-
lion in sanctions.
In addition, Canellos oversaw ac-
tions against financial institutions and
senior executives for fraud and breach
of fiduciary duty in the structuring and
marketing of collateralized debt obli-
gations. Those investigations targeted
Merrill Lynch and UBS Securities,
among others.
Canellos has also worked for the
Department of Justice as head of the
major crimes division for New Yorks
Southern District.
Winston & Strawn Lands
Esoteric ABS Partner
Daniel Passage, a former partner in
Bingham McCutchens structured trans-
actions group, joined Winston & Strawn
in the frms Los Angeles ofce.
Francisco Flores also joins Winston
& Strawn as counsel to the frm, also
from Bingham McCutchen.
Passages specialty is in structuring
programs and transactions involving the
origination, fnancing, and securitization
of the run asset classes, including life set-
tlements, premium fnance loans, annui-
ties, patent and trademark license royal-
ties, trade receivables, automobile leases,
sales contracts and dealer foorplan re-
ceivables, collateralized bond obligtions,
collateralied loan obligtions, commercial
and residential mortgages, reverse mort-
gages, credit card receivables, lottery re-
ceivables, structured settlements, solar
leases, power purchase agreements, and
PACE Bonds.
Flores will focus on structured prod-
ucts and cross-border transactions in
Latin America.
Cantor Adds Sales,
Trading Directors
Cantor Fitzgerald added two managing
directors to its fxed income sales and
trading team.
Paul Baeri will focus on distressed
debt, leveraged loans, high yield and spe-
cial situations. Kevin Quinn focuses on
securitized and structured product sales.
Baeri was most recently with Global
Hunter Securities, where he was cohead
of high yield and distressed sales. He
was a managing director on Gleachers
high yield team,
worked in loan
sales and dis-
tressed trading
at JPMorgan
and was in fxed
income trading
with Goldman
Sachs.
Quinn was
most recently
director for
fxed income
sales at Wells Fargo Securities. He has
held positions with JPMorgan, Deutsche
Bank, Citigroup, J.F. Lehman & Co.
and PricewaterhouseCoopers.
JPMorgan Cuts Mort-
gage Products, Jobs
JPMorgan Chase is scaling back its
mortgage products as the market cools.
Te company plans to eliminate 22
of its 37 mortgage products and pro-
grams by the end of 2014, according to a
Feb. 25 presentation to investors. It has
already jettisoned 12 and plans to slash
10 more by the end of the year.
JPMorgan will also cut 8,000 jobs
from its consumer and mortgage bank-
ing divisions this year. It attributed the
decision to the refnancing slowdown.
On the block are JPMorgans part-
nership rewards program, non-agency
relationship credit program and second
lien home equity loan.
Te company is committed to the
mortgage business for the long run
despite current challenges facing the
industry, mortgage banking chief ex-
ecutive Kevin Watters said to scattered
laughter during the presentation.
Ex-Enforcer Canellos Hops from
SEC to Milbank
PEOPLE
ON THE MOVE
George Canellos
Paul Baeri
023_ASRMar14 1 2/26/2014 10:33:33 AM
ABS
REPORT
T
he subprime credit card market,
long down for the count, may f-
nally be poised for a comeback.
A team assembled by ex-regulator
Raj Date is preparing to launch a plas-
tic card for Americans who dont qualify
for mainstream credit. Over the last fve
years, that segment of the market has
been hollowed out by shifing economic
forces and an overhaul of regulations.
Te fedgling credit card venture is
owned by Fenway Summer, a Washing-
ton-based advisory frm that Date found-
ed afer he lef the Consumer Financial
Protection Bureau a year ago. Dates
team is partnering with a bank the
identity of which has yet to be revealed
that will issue the cards. Its goal is to
start ofering the product to consumers
within six months or less.
In an interview, Date said that for
many cash-strapped consumers, sub-
prime credit cards are a better option
than payday loans. For fnancial institu-
tions, he argued, subprime cards can of-
fer an attractive risk-adjusted return, de-
spite regulatory changes that have reined
in certain fees. Te size of the subprime
card market has probably come down
by a factor of three or four since before
the recession until now. Which is a real
shame, Date said. Its better for consum-
ers, its better for providers. We should be
doing more of it, not less.
Te newly assembled team at Fenway
Summer has considerable experience
both at Capital One Financial, a lead-
ing player in subprime credit cards, and
at the government agency responsible
for protecting consumers from the card
industrys abuses.
Last month Date hired Marla Blow
to serve as chief executive of the new
subprime credit card venture. Blow spent
seven years in fnance and risk roles at
Capital One before joining the CFPB,
where she served as assistant director of
card and payments markets.
Another Capital One veteran, Toby
Shum, is the new ventures chief fnan-
cial ofcer.
Serving as an adviser to the credit card
initiative is Miles Reidy, an ex-chief fnan-
cial ofcer for Capital Ones credit card
operations. Also on the board of directors
is Jane Thompson, the former president
of Walmart Financial Services.
Many details regarding the pricing,
branding and structure of the new sub-
prime card are still being determined.
But the card is likely to carry a fee and
ofer no rewards, and to be targeted at
consumers with credit scores around
620, according to Fenway Summer ex-
ecutives.
Te subprime card is being designed
for consumers who have been relying
on payday loans, or other high-priced
sources of credit, and are showing signs
of an increased ability to manage credit
responsibly.
In any given pool of new payday
customers, six out of 10, or seven out of
10, ultimately are going to default, Date
said. Well, three or four out of those 10
are not. And those people have shown
the ability to be fnancially resilient even
in times when they have kind of an idio-
syncratic need for funding.
Since the start of the recession, it has
become harder for consumers with low
credit scores, low incomes, or both, to
qualify for a credit card. Te volume of
direct mail marketing for cards with a
fee and no rewards fell by 85% between
the fourth quarter of 2007 and the fourth
quarter of last year, according to data
from Mintel Comperemedia.
Factors that drove the industrys con-
traction include the 2009 passage of the
Card Act, which limited card issuers
ability to charge late fees and over-limit
fees, and changes in accounting rules
that made the subprime card business
more capital-intensive.
Whats more, at a time of high unem-
ployment, consumers have been more re-
luctant to take on debt, while card issuers
have also become more risk-averse.
Today, the subprime market still in-
cludes Capital One, which bought HS-
BCs subprime card business in 2011, but
the combined frms footprint is smaller
than it used to be. Specialized lenders
like First Premier Bank in Sioux Falls,
S.D., and Merrick Bank in South Jordan,
Utah, also compete for subprime bor-
rowers.
Te debut of Fenway Summers new
subprime card venture would come at
a time when banks are trying to deter-
mine whether they can proftably lend to
customers who currently rely on payday
lenders, auto title lenders and other high-
priced forms of credit.
Late last year, federal banking regula-
tors issued new rules requiring banks to
ensure that borrowers have the ability to
repay short-term consumer loans without
rolling them over into a new loan. In re-
sponse, all six U.S. banks that ofered de-
posit advances, a product with strong sim-
ilarities to a payday loan, announced last
month their plans to quit the business.
Subprime credit cards could allow
banks to fulfll some of the consumer
demand that remains in the wake of the
deposit advances demise.
Kevin Wack, American Banker
Raj Dates Firm to Launch
Subprime Credit Card
024_ASRMar14 1 2/26/2014 11:14:46 AM
T
he powerful storm surge pro-
duced by Hurricane Sandy has
added momentum to the federal
governments eforts to farm out a por-
tion of the risk now borne by the Nation-
al Flood Insurance Program (NFIP),
and their appears to be a strong appetite
in the private market.
In late January, the Government Ac-
countability Ofce (GAO) published a
30-page report exploring what conditions
would prompt stakeholders to buy into
food risk and the possible structure for
such transactions.
Te big question is how the pricing
would actually work in the private mar-
ket compared to the current market, said
Brian Schneider, a senior director at
Fitch Ratings. Teres not a lot of food
risk out there now in the asset-backed
securities or traditional reinsurance mar-
kets. So its uncertain what the true cost
will be to policy holders.
Te NFIP, created in 1968, provides
subsidized food insurance policies to
residents in food-prone areas, but the
premiums on these policies dont refect
the actual risk of property loss. To plug
the funding gap, the Federal Emergency
Management Agency (FEMA), which
manages the program, has borrowed
$24 billion from the U.S. Treasury as of
September 2013, and not paid back any
principal on its loans since 2010. Before
Hurricane Sandy, it had borrowed a total
of $17.8 billion. Tats a signifcant tax-
payer burden, but the only option for
homeowners, since private insurance
policies typically exclude fooding, even
though it is the most common and de-
structive natural disaster in the U.S.
Te Biggert-Waters Flood Insurance
Reform Act of 2012 eliminated some
subsidies and took other measures to im-
prove the NFIPs solvency, although leg-
islation on Capitol Hill seeks to reverse
some provisions, at least temporarily.
Te Biggert-Waters Act also tasked
FEMA with exploring ways to farm out
food risk to the private market. Te GAO
report identifes catastrophe bonds as a pos-
sible strategy. NFIP could issue interest-
bearing bonds to investors willing to bear
the risk of losing some of their investment
if food claims exceeded a predetermined
amount, the report states, adding that, the
NFIP would need to be able to collect ad-
equate premiums to cover any necessary
payments of principal or interest.
Other strategies described in the GAO
report include charging policy holders rates
that refect the actual risk and then provid-
ing a means-based subsidy; insuring only
the properties with the highest risk; and the
government acting as a reinsurer, paying
the diference when total claims on private
policies exceed a certain amount.
Te New York Metropolitan Trans-
portation Authority issued the frst
storm surge deal last July, afer Hurricane
Sandy fooded several subway tunnels. As
a result of strong demand, it was upsized
by 60%, to $200 million, and its 4.5% rate
was under the original price range.
Risk Management Solutions was
the risk modeling agent on the deal. It
launched the frst stand-alone storm surge
model, separate from its hurricane model,
a year before Hurricane Sandy. Managing
director Peter Nakada said several other
storm surge deals are in the pipeline and
likely to come to market this year. He said
that RMSs model closely predicted the
Sandy-related fooding that occurred.
Nakada said likely issuers include
infrastructure-related businesses as well
as private businesses that are particu-
larly vulnerable to fooding. For example,
a number of hospitals have lost MRI
equipment that was stored in basements
during recent hurricanes.
Insuring thousands of individual
properties from food damage is a dif-
ferent matter. State insurance agencies
such as Florida Citizens and Louisiana
Citizens Property Insurance have suc-
cessfully leveraged demand for hurricane
risk, especially from capital markets in-
vestors, to lower both their cat bond and
reinsurance rates.
Rates on these kinds of wind-related
deals have fall dramatically over the last
few years, as institutional demand for
catastrophe risk has ramped up. Tat dy-
namic is likely to continue across insur-
ance-linked securities based on diferent
perils and could enable food policy pre-
miums to drop to more acceptable levels.
John Hintze
Private Alternative for Flood
Insurance Gains Traction
ABS
REPORT
The big question is how the pricing would actu-
ally work ... theres not a lot of food risk out there
now in asset-backed securities.
025_ASRMar14 1 2/25/2014 11:41:20 PM
ABS
REPORT
R
egulation AB governs registra-
tion, reporting and disclosure
requirements for all things asset-
backed. Te Securities and Exchange
Commission appears to be ready to up-
date it signifcantly, but, nearly four years
afer changes were originally proposed,
its not clear exactly what the Commis-
sion will do.
Te original Reg AB was published in
December 2004. It codifed years of guid-
ance and practice in the regulation of this
market, which did not exist when the Se-
curities Act of 1933 and the Exchange
Act of 1934 were created.
In April 2010, the SEC proposed revi-
sions that substantially changed the rules
of the game. As summarized by Richard
Jones, co-chair of Decherts fnance and
real estate practice group, in a post on the
frms Crunched Credit blog, It imported
risk retention into shelf registration, im-
posed draconian liability, creating certi-
fcation responsibilities on the sponsors
CEO or unit head, and imposed new
self-reporting obligations with onerous
penalties for relatively minor matters of
non-compliance among others.
Vote Appears, Disappears from
Agenda of SEC Board Meeting
But the Dodd-Frank Act was passed just
a few months later, and it became clear
regulators would have to focus on bring-
ing the massive new fnancial-reform
law to life. Some thought that Reg AB II
would ultimately be shelved, given the
conservative structures of asset-based
securities issued post fnancial crisis,
and the fact that some of its provisions,
including a risk-retention requirement,
were co-opted by Dodd-Frank.
In fact, when the SEC re-proposed
Reg AB-II in August 2011, the commis-
sion did away with the risk-retention
provision; the re-proposal also changed
some requirements for issuers pursuing
shelf flings for asset-backed securities.
Two and a half years went by.
Ten in January of this year, at the
41st annual Securities Regulation Insti-
tute in California, SEC Chairman Mary
Jo White said that Reg AB II was on the
SECs radar screen for 2014. Later that
month, the SEC published a notice stat-
ing that it would consider adopting some
of Reg AB II at its Feb. 5 board meeting.
Te notice stated that the revisions
would require asset-backed issuers to
provide enhanced disclosures includ-
ing information for certain asset classes
about each asset in the underlying pool in
a standardized, tagged format and revise
the shelf ofering process and eligibility
criteria for asset-backed securities.
Ten two days before the board meet-
ing, on Feb 3, the SEC announced it had
removed Reg AB II from the agenda.
Te Commission declined to com-
Regulation AB II: Back from
Limbo?
ment for this article, although a source
familiar with the regulators thinking said
that the point of rescheduling the meet
ing was to provide time for additional
public comment.
Questions About Swap Flip Clause
Teres also been speculation that Reg AB
was removed from the agenda because
White had misjudged support for the re
visions among the commissioners. Tere
were also reports that commissioners
wanted additional time to consider an
issue related to swaps used in most ABS
and whether the disclosure of certain el
ements of those transactions should be
included in Reg AB II.
Te timing may be coincidental, but
a letter questioning whether Reg AB-2
will require disclosure of a ubiquitous se
curitization-swap feature that could force
issuers to scramble for cash arrived Feb.
2, a day before the vote was pulled from
the Commissions agenda.
Market participants tracking the is
sue scofed at the notion that the recent
letters concerns--in the public sphere for
several years now--were the cause. Te
diference now, however, may be that
William Harrington
vice president at
vice who focused on structured fnance,
is now raising the issue in the context of
an active regulatory initiative that aims
to increase transparency in the securiti
zation market. Such transparency could
require issuers to alter or eliminate such
clauses from future deals, and legacy
deals could be downgraded.
Its a disclosure item, and I think
thats the Reg AB standardinformation
should be disclosed in a way that sophis
ticated investors can parse through the
risk themselves, Harrington said in an
interview.
Harrington is specifcally referring
to the fip clause prevalent in securi
tization swaps that issuers use to hedge
against non-credit risks, such as interest-
Lorem Ipsum...
026_ASRMar14 1 2/26/2014 11:14:56 AM
of Reg AB II at its Feb. 5 board meeting.
Te notice stated that the revisions
would require asset-backed issuers to
provide enhanced disclosures includ-
ing information for certain asset classes
about each asset in the underlying pool in
a standardized, tagged format and revise
the shelf ofering process and eligibility
criteria for asset-backed securities.
Ten two days before the board meet-
ing, on Feb 3, the SEC announced it had
removed Reg AB II from the agenda.
Te Commission declined to com-
Regulation AB II: Back from
ment for this article, although a source
familiar with the regulators thinking said
that the point of rescheduling the meet-
ing was to provide time for additional
public comment.
Questions About Swap Flip Clause
Teres also been speculation that Reg AB
was removed from the agenda because
White had misjudged support for the re-
visions among the commissioners. Tere
were also reports that commissioners
wanted additional time to consider an
issue related to swaps used in most ABS
and whether the disclosure of certain el-
ements of those transactions should be
included in Reg AB II.
Te timing may be coincidental, but
a letter questioning whether Reg AB-2
will require disclosure of a ubiquitous se-
curitization-swap feature that could force
issuers to scramble for cash arrived Feb.
2, a day before the vote was pulled from
the Commissions agenda.
Market participants tracking the is-
sue scofed at the notion that the recent
letters concerns--in the public sphere for
several years now--were the cause. Te
diference now, however, may be that
William Harrington, a former senior
vice president at Moodys Investors Ser-
vice who focused on structured fnance,
is now raising the issue in the context of
an active regulatory initiative that aims
to increase transparency in the securiti-
zation market. Such transparency could
require issuers to alter or eliminate such
clauses from future deals, and legacy
deals could be downgraded.
Its a disclosure item, and I think
thats the Reg AB standardinformation
should be disclosed in a way that sophis-
ticated investors can parse through the
risk themselves, Harrington said in an
interview.
Harrington is specifcally referring
to the fip clause prevalent in securi-
tization swaps that issuers use to hedge
against non-credit risks, such as interest-
rate or currency fuctuations. Te clause
fips the payments required, should a
bank counterparty to a securities swap
default, from a senior obligation to a sub-
ordinated one.
A securitization swap with a fip
clause has long been the go-to derivative
contract for the ABS industry because
securitization swaps keep issuance costs
artifcially low, Harrington writes in a
follow up letter to the SEC dated Feb. 17.
An ABS issuer pays no upfront [fee] to
enter into a securitization swap, nor sets
aside reserves against counterparty insol-
vency.
Harrington argues that fip clauses
present a signifcant risk to issuers be-
cause a default by a bank counterparty
accelerates swap payments, and U.S.
Bankruptcy Judge James Peck held in
2010 that fip clauses are not enforceable
under U.S. bankruptcy law. If that rul-
ing is upheld, it means that issuers owing
money to a bank counterparty may have
to take drastic actions that could hurt in-
vestors in order to make payments.
When a fip clause is not upheld
against an insolvent counterparty, as oc-
curred with respect to Lehman Broth-
ers, an ABS issuer must divert funds that
had been earmarked for timely payment
of interest and principal towards paying
a lump-sum termination amount to the
insolvent counterparty, instead, Har-
rington writes.
In fact, says Harrington, fip clauses
present a systemic risk, because a default
by one of the major bank counterparties
could impact hundreds of securitiza-
tions. He adds that fortunately Lehman
Brothers provided very few securitiza-
tion swaps to issuers of cash-fow ABS.
AIG, however, provided such swaps
to many, many issuers who, but for the
2008 bail-outs, would have been obligat-
ed to pay large, lump-sum termination
amounts to AIG, rather than pay inter-
est and principal according to its terms
and conditions, Harrington writes.
In addition to the SEC, Harrington
has recently discussed the issue with of-
fcials at the Federal Reserve, which
oversees many tens of billions of dollars
in ABS posted by banks and held on its
balance sheet.
Harrington believes that fip clauses
should be eliminated entirely. While they
are present, however, he believes they
should be adequately disclosed along
with other key items such as the swaps
bank counterparties and guarantors, giv-
en that counterparty risk is concentrated
among relatively few of them.
Reg AB II is perfect for investors to
put this together, Harrington said, add-
ing that in terms of existing deals carrying
fip clauses, What should really happen
is these deals should be downgraded.
Private Offerings May Lose Appeal
Now people familiar with the matter
think that the proposal will be addressed
by the end of the second quarter, when
the Dodd-Frank risk retention rules are
also expected to be fnalized.
Until some clarity emerges, market
participants will have to be prepared for
any or all of the of the proposals revisions
ABS
REPORT
A nonperforming loan pool may have 1200 or
1700 underlying assets and an issuer isnt going to
include a page of information for each one.
027_ASRMar14 2 2/26/2014 11:15:09 AM
J
PMorgan Chase may be the
quintessential New York money
center bank, but the Big Apple is
a rare market where it lags in multifam-
ily lending.
Nationwide, the largest U.S. banks
apartment loan business is mushroom-
ing, aided by a pullback by Fannie Mae
and Freddie Mac. Among banks, JPMor-
gan is the largest multifamily lender by
far, with a portfolio that dwarfs its clos-
est competitor. Yet much of that lending
has taken place in Western markets like
Los Angeles and San Francisco, since
the team responsible was inherited from
Washington Mutual, the failed Seattle
thrif JPMorgan acquired in 2008.
Now the bank is
refocusing on New
York, where the
fundamentals for
apartment lending
are attractive and
where JPMorgans
also-ran status has
caught the attention
of Chief Executive
Jamie Dimon.
I know Jamie
and other execu-
tives tease me about
it, says Al Brooks,
who heads commer-
cial term lending
for JPMorgan Chase
out of Irvine, Calif.
Were throwing a lot
of our focus there
but we have a long ways to go.
Apartment lending continues to hold
its allure for JPMorgan Chase despite
ferce competition for apartment loans,
an expected rise in interest rates next
year and potentially slower growth ahead.
Competition has led to lower credit stan-
dards that could spell bad news down
the road for banks that hold multifamily
loans on their balance sheets, some bank-
ers and analysts say. But others point to
the mandated pullback in multifamily
lending by Fannie Mae and Freddie Mac
that has redirected billions in new lend-
ing to banks.
Filling Void Left by Fannie, Freddie
Banks are desperate for loan growth
and this has been one of their main
engines, says Tad Philipp, director
of commercial real estate research at
Moodys Investors
Service.
Multifamily lend-
ing was the frst as-
set class to rebound
from the housing
downturn, and sev-
eral factors, includ-
ing demographics,
are still working in its
favor. Tough Fan-
nie and Freddie still
dominate the sec-
tor together they
back about 45% of
all multifamily loans
the government-
sponsored enter-
prises were required
last year to cut their
fnancing of apart-
ments by 10%. No such mandates have
yet been announced this year, but ana-
lysts expect another pullback.
Te loans Fannie and Freddie would
have made are going to banks, says
Philipp, who estimates $6 billion in new
lending has been freed up for banks and
other funding sources such as insurance
companies and investors in commercial
mortgage-backed securities.
Brooks acknowledges the pullback by
the GSEs has had some impact. Tough
JPMorgan Chase dominates multifam-
ily lending its book of loans is twice
that of the No. 2 lender, New York Com-
munity Bancorp it managed to post
a 16.5% jump in such mortgages from a
year earlier, to $45 billion in the fourth
quarter, according to Trepp, a provider
of research on commercial lending.
Theyre the 800-Pound Gorilla
To put that growth in perspective, JPM-
organ Chases $6.4 billion year-over-year
increase is bigger than any of the portfo-
lios of all but fve other banks. If a new
bank went out and loaned $6.4 billion
against apartment buildings, matching
JPMorgan Chases fourth quarter vol-
ume, that bank would be the seventh-
largest multifamily lender in the U.S.
Ten again, these numbers look smaller
in light of JPMorgans total assets of $2.4
trillion.
Teyre the 800-pound gorilla, says
Richard Ehst, president and chief op-
erating ofcer of $4.2 billion-asset Cus-
tomers Bancorp in Wyomissing, Penn.,
which itself posted a $700 million annual
increase in multifamily lending.
Even more astonishing is that JPMor-
gan Chase courts customers with small-
er-balance loans. Its average loan size is
just $1.8 million. Were doing a lot of
little loans, Brooks says.
Te bank has won customers by re-
JPMorgans Appetite for
Multifamily Keeps Growing
fusing to charge junk fees for apprais
als and legal costs, says Brooks, who used
that strategy at
where he held the same job. Brooks also
touts short turnaround times of 45 days
or less, compared to the 65 to 90 days it
takes other banks to fund a loan. JPMor
gan Chase has standardized loan docu
ments to reduce costs and stress to bor
rowers.
We ofer things others cant. We use
our size to tap the value to the custom
er. Its why we tend to get the frst call,
Brooks says.
Apartment lending is kind of in
fux, Brooks says. Tough he doesnt an
ticipate another big run-up in rents this
year, he also is not seeing any signs of
banks retrenching.
Matt Anderson
tor at Trepp, says the foreclosure crisis
turned out to be a boon for multifamily
lending because millions of former ho
meowners, now with blemished credit,
became renters. Younger households also
have put of buying homes either because
of the difculty of qualifying for a mort
gage or because of a lack of steady em
ployment.
Even with all the growth that has
occurred over the last two to three years,
multifamily lending has been a bright
spot and demand is still quite strong,
Anderson says.
Surge in Construction
A handful of markets, including Austin,
Texas, and Raleigh, N.C., have seen a
surge in construction, causing Moodys
to warn that some markets could become
overheated.
Competition also has tempted a few
lenders to lower credit standards. Some
are allowing loan-to-value ratios as high
as 85%, when 70% is the norm, says Ehst
at Customers Bancorp. Another problem
is cash-out refnances of 40% to 50%, he
says, which is far above the typical 20% to
25% and could leave some landlords with
Al Brooks
MBS
REPORT
028_ASRMar14 1 2/25/2014 11:41:31 PM
have made are going to banks, says
Philipp, who estimates $6 billion in new
lending has been freed up for banks and
other funding sources such as insurance
companies and investors in commercial
Brooks acknowledges the pullback by
the GSEs has had some impact. Tough
JPMorgan Chase dominates multifam-
ily lending its book of loans is twice
New York Com-
it managed to post
a 16.5% jump in such mortgages from a
year earlier, to $45 billion in the fourth
, a provider
of research on commercial lending.
Theyre the 800-Pound Gorilla
To put that growth in perspective, JPM-
organ Chases $6.4 billion year-over-year
increase is bigger than any of the portfo-
lios of all but fve other banks. If a new
bank went out and loaned $6.4 billion
against apartment buildings, matching
JPMorgan Chases fourth quarter vol-
ume, that bank would be the seventh-
largest multifamily lender in the U.S.
Ten again, these numbers look smaller
in light of JPMorgans total assets of $2.4
Teyre the 800-pound gorilla, says
, president and chief op-
erating ofcer of $4.2 billion-asset Cus-
in Wyomissing, Penn.,
which itself posted a $700 million annual
increase in multifamily lending.
Even more astonishing is that JPMor-
gan Chase courts customers with small-
er-balance loans. Its average loan size is
just $1.8 million. Were doing a lot of
Te bank has won customers by re-
Multifamily Keeps Growing
fusing to charge junk fees for apprais-
als and legal costs, says Brooks, who used
that strategy at Washington Mutual,
where he held the same job. Brooks also
touts short turnaround times of 45 days
or less, compared to the 65 to 90 days it
takes other banks to fund a loan. JPMor-
gan Chase has standardized loan docu-
ments to reduce costs and stress to bor-
rowers.
We ofer things others cant. We use
our size to tap the value to the custom-
er. Its why we tend to get the frst call,
Brooks says.
Apartment lending is kind of in
fux, Brooks says. Tough he doesnt an-
ticipate another big run-up in rents this
year, he also is not seeing any signs of
banks retrenching.
Matt Anderson, a managing direc-
tor at Trepp, says the foreclosure crisis
turned out to be a boon for multifamily
lending because millions of former ho-
meowners, now with blemished credit,
became renters. Younger households also
have put of buying homes either because
of the difculty of qualifying for a mort-
gage or because of a lack of steady em-
ployment.
Even with all the growth that has
occurred over the last two to three years,
multifamily lending has been a bright
spot and demand is still quite strong,
Anderson says.
Surge in Construction
A handful of markets, including Austin,
Texas, and Raleigh, N.C., have seen a
surge in construction, causing Moodys
to warn that some markets could become
overheated.
Competition also has tempted a few
lenders to lower credit standards. Some
are allowing loan-to-value ratios as high
as 85%, when 70% is the norm, says Ehst
at Customers Bancorp. Another problem
is cash-out refnances of 40% to 50%, he
says, which is far above the typical 20% to
25% and could leave some landlords with
very little skin in the game.
Te one thing that all banks are go-
ing to have to look out for is what hap-
pens to cap rates down the road, says
Ehst, referring to capitalization rates, a
commonly used ratio to determine apart-
ment yields. It can be a slippery slope.
Its important to stress test every loan to
compensate for what could happen in a
rising rate environment.
Still, housing prices in markets like
San Francisco remain sky-high. A dearth
of supply has led to rising rents and low
occupancy rates, a low-risk combina-
tion that prodded JPMorgan Chase to
open the lending spigot in 2010. Tough
JPMorgan Chase was careful not to lend
too heavily in markets like Las Vegas or
Phoenix, where there was never a big dis-
parity between rents and mortgage pay-
ments, Brooks admits New York has not
been a big enough focus.
Its all about economics, Brooks
says, explaining the New York markets
appeal. Renting is the most economical
way for someone to live in a great part
of town and the most extreme example is
New York, where the diferential between
rent-controlled units and market-rate
rents is the greatest in the country.
Commercial, Multifamily Origina-
tions to Grow 7% in 2014
Commercial and multifamily mortgage
originations will grow to $300 billion
in 2014 a 7% increase from last year,
according to the latest forecast from the
Mortgage Bankers Association.
Te positive trend will continue
through 2016 as originations in those
categories increase to $333 billion, ac-
cording to the MBA.
Early indications are that commer-
cial and multifamily lenders increased
originations by 15% in 2013, Jamie
Woodwell, MBAs vice president of com-
mercial real estate research, said in a Feb.
3 press release.
Tis year will once again see fewer
loans coming up against their maturities.
But with still low interest rates, improv-
ing property fundamentals, a rebound in
property prices, and higher loan maturi-
ty volumes on the horizon, we anticipate
mortgage originations will continue to
increase in 2014.
Te outstanding debt from commer-
cial and multifamily mortgages will also
rise in 2014, according to the forecast.
Mortgage debt outstanding is projected
to increase to $2.6 trillion by the end of
2014 up more than 3% from the same
period the year before. Te MBA pre-
dicts that mortgage debt outstanding will
reach $2.7 trillion by the end of 2016.
Te MBA also released a survey in-
dicting that the amount of commercial
and multifamily mortgages will decline i
2014 for the fourth straight years.
Te survey found that 6%, or $91.7
billion of the $1.5 trillion of outstanding
commercial and multifamily mortgages
held by non-bank lenders and investors,
will mature in 2014. Tat represents a
23% decline from the $119.5 billion that
matured in 2013. Maturities will grow to
$213 billion in 2016.
Kate Berry, American Banker
Jamie and other executives tease me about it.
Were throwing a lot of our focus there [in New
York] ... but we have a long ways to go.
MBS
REPORT
029_ASRMar14 2 2/25/2014 11:41:50 PM
ABS
REPORT
to reappear. For the buyside, whatever
the SEC eventually puts on the Reg AB-
II table is likely a plus, at least in terms
of analyzing credits, because the over-
reaching goal is to improve disclosure
and transparency. For issuers and under-
writers, excessive transparency can make
deals more costly and cumbersome and
potentially uneconomical to pursue.
For example, the original proposal
would require issuers that rely on Rule
144A of the Securities Act of 1933 to
avoid registering a deal with the SEC to
provide disclosures similar to those pro-
vided on public deals upon request from
investors. Tere would still be some ad-
vantages to private oferings, in particu-
lar avoiding lengthy SEC reviews, but
they would be more costly to bring to
market.
Te proposal raised concerns in the
industry, because 144A oferings tend to
include somewhat less disclosure and
can be completed more efciently than
their public counterparts, said John
Arnholz, leader of Bingham McCutch-
ens structured fnance group.
Such disclosures would have more
of an impact on some asset classes than
others. Decherts Jones said that com-
mercial mortgage-backed securities
(CMBS) have long provided copious
loan-level information, and so the pro-
posed disclosures would be relatively
easy to comply with.
He added that other asset classes,
such as residential mortgage-backed
securities (RMBS) and credit card ABS,
pool thousands of loans, and while they
also tend to provide granular informa-
tion, the sheer number of underlying
loans means that disclosure must be
approached diferently than in CMBS.
Te new regulations may have a signif-
cant impact about how this information
is disclosed and the regulators eforts
to enhance disclosure could make the
process burdensome without attendant
benefts to investors.
A nonperforming loan pool may
have 1200 or 1700 underlying assets,
and an issuer isnt going to include a
page of information for each one, Jones
said. Today, theyll typically provide
a tape with information on a 100 or so
felds, and the market appears to view
that as enough.
In the wake of the fnancial crisis it
became apparent that transparency was
inadequate for complicated ABS trans-
actions such as collateralized debt ob-
ligations (CDOs), which ofen referred
to assets in other deals. Te original Reg
AB proposal sought to address this by
requiring more loan-level disclosures.
Te proposed disclosures would be
more burdensome for problematic asset
classes such as RMBS, but they would
be expanded signifcantly also for asset
classes that performed relatively well
through the fnancial crisis, such as auto
or credit-card ABS.
We would like to emphasize our
opposition to loan level public disclo-
sure on the basis of obligor privacy is-
sues, compliance expenses, and com-
petitive concerns, Mary Ellen Kummar,
assistant treasurer at Navistar Financial
Corp., a manufacturer of heavy vehicles
and engines, said in a comment letter on
the original Reg AB proposal.
We believe continued consideration
of loan level disclosure for the equip-
ment foorplan ABS and equipment
ABS industry by the Commission would
create undue burdens on issuers that far
outweigh any benefts to investors.
Kummar went on to note in her com-
ment on the original proposal that two
auto ABS issuers estimated the cost of
compliance with the SECs loan-level data
felds at well over $1 million per issuer.
Some aspects of the original pro-
posal were widely applauded, especially
by investors. For example, the proposal
sought to slow down the ofering pro-
cess, in part by requiring a preliminary
prospectus to be delivered to investors at
least fve days before the sale of notes.
Even though these prospectuses can
be as thick as a phone book, the securi-
ties laws provide little time for investors
to read them, said Arnholz.
Another provision would require is-
suers to provide a payment waterfall
computer program that models an of-
ferings anticipated cash fows, using the
Python open-source programming lan-
guage as a standard. In addition to ques-
tions about how issuers would ascertain
the accuracy of an issuers waterfall pro-
gram, concerns arose that issuers may
be subject to a new liability if a faulty
program results in the wrong party get-
ting paid.
A large swathe of the ABS indus-
try commented that the provision was
unworkable. Former SEC Chairman
Christopher Cos, now a partner at
Bingham McCutchon, told participants
at a recent ABS conference to expect the
waterfall program to be lef out of Reg
AB-2, perhaps to be re-proposed in a
separate rule at a later date.
Another element raising liability
concerns was a requirement for the is-
suers CEO or ofcer in charge of secu-
ritization to certify that the assets have
characteristics that provide a reason-
able basis to believe they will produce,
taking into account internal credit en-
hancements, cash fows at times and in
amounts necessary to service payments
on the securities as described in the pro-
spectus.
Tat provision appeared in the 2011
re-proposal, as one of several compo-
nents to replace the investment-grade
rating previously required for shelf of-
ferings, given Dodd-Franks push to re-
duce reliance on public ratings.
We werent sure what that meant,
and it sounded like a guarantee, said
Jones, adding, ABS deals assume not
all assets will pay of and there will be
defaults. Deals are structured to address
that risk. John Hintze
030_ASRMar14 3 2/26/2014 11:15:27 AM
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