The Structured Finance Association is joining Rep. Scott Fitzgerald, R-Wis., and others as support builds for the SEC to take another look at a rule that could reshape the mortgage securities market.
The SEC has requested comment on the Reg AB II rule that’s generally shut private-label residential mortgage-backed securities issuers out of the public market since 2013. The government-related MBS that currently dominate the market are exempt from the rule.
“A vibrant public RMBS market is essential to expanding mortgage credit, lowering costs for families and ensuring a resilient housing finance system,” SFA CEO Michael Bright said in a press release.
U.S. Department of Housing and U/Mitch Miller
His comments support Fitzgerald’s, who said in a letter to SEC Chairman Paul Atkins late last week that while the private RMBS market has been active through deals issued under Rule 144A to qualified institutional investors, housing could benefit from additional public deals.
“A public, registered RMBS market would increase the sources of private capital from insurance companies, REITs and other investors that face limits to their investments in private placements, thereby dramatically increasing the availability of mortgage credit,” Fitzgerald said in the letter.
Fitzgerald sits on the House’s Financial Services and Judiciary Committees.
The broader range of groups seeking change
The Mortgage Bankers Association also plans to send input on Reg AB II to the commission before a Dec. 1 deadline. The association included the rule on a list of those it would like to see revisions to earlier this year.
“A more robust, sustainable private RMBS market would increase the diversity of housing finance capital sources, making the system more resilient and promoting greater liquidity, while also lowering costs and improving choices for borrowers,” the MBA said in a statement. “This has once again gained focus as part of discussions regarding housing finance reform and the future of the GSEs.”
Ed DeMarco, president of the Housing Policy Council, has been an advocate of prudently modernizing Reg AB II with the aim of opening up the market. He has suggested that policymakers reference the 144A RMBS market in doing so.
“An examination of these deals reveals a common set of disclosure benchmarks from which the SEC could reformulate aspects of Reg AB II,” he wrote in a NMN op-ed published in 2019.
A spokesperson for the council confirmed HPC is still backing this type of change. SFA also has been discussing the potential for 144A practices to be applied to public market standards among a broad range of capital markets participants, including investors.
“We continue to believe that thoughtful reform of Reg AB II is essential to the return of private capital to the mortgage market,” HPC said in a statement.
While exempt government-sponsored enterprises that back MBS are competing with private issuers, policymakers who are rethinking the enterprises’ role could have more flexibility in pursuing different options for reform if the market for mortgage bonds were to expand.
Where investors want caution in scaling back Reg AB II
Investors and others who remember the mass underperformance of mortgage bonds in the 2008 crisis that put many firms out of business and forced the GSEs into conservatorship want to make sure they don’t lose any essential protections in rethinking in Reg AB II.
SEC Commissioner Caroline Crenshaw urged commenters in a September statement to “be mindful of removing requirements that serve to provide transparency and consistency in aid of investor analysis and diligence or provide information that bolsters market integrity.”
Other issues besides disclosure could challenge the return of a public market for privately issued RMBS. The government-related entities’ current domination has created concerns about whether the overall market’s pricing is aligned with its risk, and this would need to be addressed.
Reasons to revamp the rule that go beyond RMBS deregulation
The disclosure of 270 data points that Reg AB II requires for each mortgage are a common reason some stakeholders have pushed for change to it, but other reasons to rethink it exist as well, according to a recent report from Hunton.
The law firm, which primarily has a business focus, indicated that conflict between required disclosures and protections for consumer data are another reason to rethink the rule.
One possible workaround for asset-level disclosures could be in line with the idea that reform to the rule could be based on what works in the existing private-label RMBS market.
“The SEC is considering whether issuers should be permitted to use sponsored, access-controlled websites to provide sensitive ALD — similar to current Rule 144A practice,” attorneys Michael Fitzpatrick, Adam O’Brian, Amy McDaniel Williams and Ian Sterling wrote.
The re-examination of Reg AB also has implications for asset-backed securities that go beyond single-family RMBS, extending to commercial mortgage securitizations and collateralized loan obligations in the commercial real estate market, according to MBA.
