Tuesday, February 23, 2010

FDIC 'Safe Harbor' Provisions For Securitization

The FDIC's proposed rule is designed to isolate, from the failure of a bank, the underlying assets of securities held by the bank. The treatment by the FDIC of assets transferred by a bank in connection with a securitization, and the subsequent failure of the bank, is an underlying building block for securitization - simply because investors will NOT buy CMBS bonds if the underlying loans may be stripped from the CMBS pool, if the bank that originated the loan goes into FDIC conservatorship or receivership.

Under the proposed new rule, the safe harbor would be amended to include numerous preconditions regarding a transaction’s capital structure, disclosure, documentation, origination and compensation.

Yesterday, the Commercial Mortgage Securities Association (CMSA) joined the American Securitization Forum, the Mortgage Bankers Association and the Securities Industry and Financial Markets Association in submitting a comment letter to the FDIC concerning the FDIC's 'Safe Harbor' rule

The CMSA' e-mail announcing its comment letter included the following statement:

"[The] CMSA suggests that the FDIC work in concert with Congress, the Obama Administration and the other agencies that are developing securitization reforms to ensure that FDIC's safe-harbor efforts do not lead to a regulatory framework of conflicting or overlapping requirements that may impede the restoration of functioning credit markets."

Which lead to the following observations:

  • The changes needed to restart the CMBS model (referred to as "CMBS 2.0") are not easy
  • Unlike at the creation of the CMBS model in the early '90s, the financial crisis and the role of CMBS 2.0 in it is a political process - which means a large number of parties have a voice in the process
  • Mid-term elections mean that Congress will NOT address this critical component of the credit crisis once the heavy campaigning begins in August.
  • Which leads to the conclusion that in 2010, we will NOT see a return to a meaningful CMBS market.

In other words, no CMBS for the small commercial real estate borrower.