Sweeping Changes Ahead For The CMBS (Conduit Loan) Industry
– The US Treasury is planning a sweeping overhaul of the securitization
industry to require lenders to retain part of the credit risk of loans
sold to investors and put an end to the gain-on-sale accounting rules
that fueled the crisis. The overhaul aims to restore confidence in
asset-backed markets and allow them to resume supplying credit to the
economy without re-creating systemic risks. Securitization of assets –
such as mortgages and credit card loans – accounted for about half of
the credit markets before the collapse last year. Bankers
warned that the new rules would reduce the incentives to package assets
into securities, and raising financing costs. “It’s the beginning of
the unwinding of the securitization for-sale model”, a senior Wall
Street banker said. “By forcing lenders to keep part of the loans and
discarding “gain-for-sale”, the government will raise the cost of
capital and put a damper on the recovery of the credit markets”.
Under
the plan, originators will be required to retain at least 5% of the
credit risk, and would ensure that lenders have some “skin in the
game”. The proposed elimination of “gain on sale accounting” would
prevent financial companies from booking paper profits on loans –
packaged into securities as soon as they were sold to investors. The
Treasury plan would also bar credit rating agencies from assigning the
same types of ratings to credit structured products that are assigned
to corporate and sovereign bonds. In addition, issuers of asset-backed
securities would be required to disclose loan-level data and
compensation for the broker, originator and securitizer on an ongoing
basis to investors and rating agencies. Banks would only be able to
record income from securitization over time as the underlying assets
perform, rather than upfront at the time of securitization. Broker fees
and commissions would also be disbursed over time rather than up-front,
and would be reduced if an asset performed badly due to sloppy
underwriting. Sponsors would be required to stand behind their
securities by providing warranties as to the origination and the
underwriting standards on their loans. Credit rating agencies – mainly
paid by the issuers to rate their securities, would also have to
strengthen their policies to avoid conflicts of interest (it’s about
time!!).
Comments