New US regulations designed to make financial markets safer and prevent a repeat of the credit crisis could in fact kill off a major part of the secondary market in loans and leave housing finance reliant on government support forever, representatives for Wall Street's major firms are warning.
Players in the securitisation markets – where loans such as mortgages are pooled together and sold on to global investors – went to Capitol Hill yesterday to attack proposed new rules that force the issuer of mortgage-backed securities and similar bonds to keep some on its own books.
The plan, which forces firms to keep some "skin in the game" by requiring them to hold on to 5 per cent of the loans, is riddled with contractions, uncertainties and unintended consequences, lawmakers heard, and regulators should go back to the drawing board.
Tom Deutsch, director of the American Securitisation Forum, which represents banks and investors, argued that the one-size-fits-all rules could drive capital away from even the parts of the securitisation markets that have rebounded from the crisis, and ultimately make it harder to obtain finance for buying a car or a house.
What might be appropriate for the mortgage market should not necessarily be applied to the secondary market for car loans or commercial property mortgages, he said, in testimony before the Senate banking committee. "Making changes to the entire engine of the securitisation machine across all asset classes, while driving up a steep economic hill, is ultimately a recipe for a broken-down car."
One of the lessons widely taken from the credit crisis was that the firms that lent money or pooled loans for sale did not care enough about the quality of what they were selling. The result was a collapse in underwriting standards, so that even the worst sub-prime mortgage or toxic loan would be pushed through the pooling process and sold on. When investors realised there had been a collapse in standards, the sell-off of securitised bonds triggered massive losses at banks and finally a full-on market panic.
While the Dodd-Frank Wall Street reform legislation last year ordered that lenders be required to keep 5 per cent of any securitisation of their loans, it left it to regulators to work out the details. Proposals released this March ran to 367 pages of technical detail, which several of the witnesses argued at the hearing are unworkable.
More than 95 per cent of new residential mortgages in the US now come with a taxpayer guarantee, via the nationalised finance giants Fannie Mae and Freddie Mac, and the private securitisation market has remained moribund.
Markets for securities based on car loans, commercial loans and commercial property markets have rebounded, however, but could now under threat, according to Laura Prendergast, president of the Commercial Real Estate Finance Council. She said securitising commercial mortgages could become "unviable" under the current plans.