December 16, 2015 Newsletter
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December 16, 2015
 
 
SFIG News

Issue Spotlight

Spotlight on Solar Series, Part 1: Solar Industry Trends and Financing via Solar ABS

Look for Part 2 of SFIG's Spotlight on Solar Series in January: A Comparative Analysis of Solar ABS Deal Structures.

Industry Jobs

SFIG Calendar

Meetings

Events

Advocacy Outlook

Industry News Highlights

 
SFIG NEWS
SFIG DISCUSSES ABS BOND LIQUIDITY WITH CONGRESSMAN GARRETT

This morning, SFIG staff met with the staff of Congressman Scott Garrett (R-NJ) to discuss asset-backed security (“ABS”) bond liquidity. The discussion focused on European regulatory efforts to implement High-Quality Securitization (“HQS”) standards that would grant ABS products on bank balance sheets capital and liquidity relief, and the Basel Committee’s pending release of a final consultative document regarding the Fundamental Review of the Trading Book (“FRTB”).

SFIG will continue to educate Congress on matters affecting ABS bond liquidity. To view SFIG’s letter to the regulators on FRTB, please click here. To learn more about SFIG’s advocacy efforts, please contact Michael.Flood@sfindustry.org.

 
 
SFIG TO PUBLISH INTERIM GUIDE AS RISK RETENTION RMBS COMPLIANCE DATE APPROACHES

As the credit risk retention rules go into effect with respect to RMBS on December 24th, SFIG will be releasing an interim Risk Retention Industry Guide next week to set forth best practices and consensus positions around the implementation of critical elements within the final rule.

Shortly after the release of the final rule in October of 2014, SFIG and Mayer Brown LLP published a Regulatory Briefing Book to provide an in-depth summary of the final rule as well.

If you are interested in joining SFIG’s Risk Retention Industry Guide Working Group to be part of the continued efforts towards a final guide, please contact Alyssa.Acevedo@sfindustry.org

 
 
SFIG AND SIFMA SUBMIT AMICUS BRIEF IN SUPPORT OF MIDLAND’S CERT PETITION TO U.S. SUPREME COURT

Last Thursday, December 10th, SFIG and the Securities Industry and Financial Markets Association (“SIFMA”) submitted an amicus curiae brief, kindly drafted by Sidley Austin LLP, to the U.S. Supreme Court in support of Midland Funding requesting judicial review of Second Circuit Court of Appeals’ decision in Madden v. Midland Funding.

Madden chose to waive the right to file a brief in opposition to Midland’s cert petition. However, on December 14th, the U.S. Supreme Court ordered Madden to file a response, which is now due by January 13th. A vote on whether to grant review is expected in late February, though the U.S. Supreme Court could decide to move this back after all the briefs have been filed.

Midland’s original request for a rehearing by the Second Circuit that SFIG and SIFMA supported in June was denied.

The outcome of Madden v. Midland has far-reaching implications for the securitization of consumer loans, including those funded through marketplace lending channels. If the Second Circuit’s decision is upheld, then industry participants would need to evaluate the applicability of state usury laws for loans included in a securitization.

To learn more about SFIG’s amicus curiae review process, please contact Alyssa.Acevedo@sfindustry.org.

 
 
HAPPY HOLIDAYS & HAPPY NEW YEAR FROM SFIG!

SFIG will not publish a newsletter over the next two weeks in celebration of the holidays. We wish all our readers a safe and Happy Holidays and New Year. We look forward to working with you all in 2016 and will resume the Newsletter on January 6th.

 
 
ISSUE SPOTLIGHT
SFIG Spotlight on Solar: Part 1
Solar Industry Trends and Financing via Solar ABS
 by T-REX Group

Introduction

The solar industry has experienced a period of unprecedented growth over the past 15 years. Annual installations of photovoltaic (“PV”) systems in the U.S. have grown from 4 megawatts ("MW") in 2000, to over 6,000 MW today, resulting in a compound annual growth rate of nearly 70 percent, and a total growth rate of nearly 155,000 percent. This growth has been driven by three main factors in the solar industry:

  1. Rapidly declining costs: Since 2005, the blended average cost ($/Watt) of a PV system fell from approximately $8.00/watt to less than $3.00/watt.  
  2. Business model innovations: The introductions of the Power Purchase Agreement (“PPA”) and the solar lease to the industry have allowed solar developers to reach customers who previously were unable to afford solar panels. Because these agreements do not require upfront investments from customers—only contracted payments over time—developers have been able to quickly expand their customer base. Costs have fallen by over 73 percent as manufacturers, faced with increased certainty in product demand, continue to make long-term investments in panel production.
  3. The Investment Tax Credit (“ITC”): The ITC allows consumers and commercial users to reduce taxable income through a 30 percent tax credit. Since the ITC’s inception in 2006, annual solar installations have grown by over 5,000 percent.

The ITC is set to expire in 2016. However, Congress voted on December 15th to extend the 30 percent tax credit through 2019, with annual decreases from 2019 through 2022, at which time the tax credit will reach a 10 percent floor.  Prior to this action, there was considerable uncertainty as to what source of financing will fill the void left by the absence of the ITC. If it were to expire in 2016 as expected, installed solar capacity had been forecasted to drop by 57 percent, leaving total installed capacity only slightly above 2013 levels. As the market looks ahead to replace the ITC as a funding source in the coming years, there are two other financing mechanisms currently in place, yieldcos and securitization, which could fill this void in the capital stack. As discussed in more detail below, we expect that securitization is best poised to fill the gap as a source of low cost funding for sustainable growth of the solar industry. 

Yieldcos

The first funding mechanism is the yieldco, a publicly traded company that owns and operates solar projects purchased from a parent company. Yieldcos distribute up to 90 percent of cash available for distribution in the form of a dividend to shareholders. Yieldcos are similar in structure to Master Limited Partnerships (“MLPs”), which are used in the oil and gas industry to pass on income to investors. However, income for MLPs must come from certain “natural resource activities,” including crude oil and natural gas, but excluding solar assets.

Yieldcos, introduced by industry leaders such as NRG, SunEdison, and SunPower, quickly gained popularity due to two key factors. First, the low interest rate environment left many investors hungry for yield. Because yieldcos return nearly all of the cash flow from the assets to investors in the form of a dividend, they have been touted as viable alternatives to debt instruments offering historically low yields. Additionally, the yieldco allows investors to obtain exposure to renewable energy through direct ownership in the underlying asset, as opposed to owning a piece of an entire (more risky) solar company. Solar assets are typically backed by 20-30 year contracts, and thus offer stable, predictable cash flows.

However, recent volatility in the yieldco market has raised significant concerns as to the value proposition and financial sustainability of these instruments. The first concern is the effect that inevitable increases in interest rates will have on yieldcos. As interest rates rise, the impact on yieldcos will be two-fold. First, yield-hungry investors who flocked to the vehicles will likely transition gradually to more familiar fixed income investments. Additionally, it will become more expensive for the parent companies to borrow the funds to acquire the projects necessary to fuel growth.

The second issue for yieldcos is a structural one related to growth. Yieldcos attract investors by providing both income from dividends and growth in the dividend per share. Achieving the necessary growth will be challenging for yieldcos in the long-term. Given a portfolio of assets that remains the same in size, cash flows will not increase substantially over time: power produced by solar assets decreases as panels gradually degrade, and PPA rates are capped at low escalators. Additionally, the majority of the cash generated by the assets must be paid out to investors, and thus cannot be reinvested in the business to drive growth. Yieldcos must thus rely on issuance of new shares to fund the acquisitions of new projects. For these reasons, many investors have become skeptical of the long-term sustainability of the growth that yieldcos promise.

Finally, recent volatility in oil prices has adversely impacted yieldco share prices. There is no substantial economic justification for falling solar prices as oil prices decline, as oil and solar are used for different applications: oil for transportation, and solar for electrical production. Regardless, financial markets tend to link the two, with volatility in the oil markets driving down the value of publicly-traded solar assets, including yieldcos. Yieldco performance is thus tied to volatility in the oil markets, and as discussed previously in this article, this may hurt yieldcos looking to issue new shares.

Securitization

The second source of financing poised to replace the void left by tax equity is securitization. Like yieldcos, securitization has recently gained popularity in the solar industry. In a solar asset backed securitization, securities are backed by pools of cash-flow generating assets, such as PPAs, leases, or loans. While the cost of capital on tax equity is upwards of 7 percent, the cost of funds for Class A tranches of solar securitizations has ranged from 4.02 - 4.8 percent. It is important to recognize that costs of capital for solar securitization should continue to fall as investors and rating agencies become more comfortable with the solar ABS asset class. Issuers can use the funds obtained through securitization to pay off more expensive sources of capital on the balance sheet and to fund future development at more attractive rates. The ability to access capital at lower costs to drive growth has been a major force behind the adoption of securitization in the solar space.

Furthermore, the structural nature of securitization has benefits that make it a more attractive financing option than yieldcos. While yieldcos are subject to certain aforementioned concerns which the parent company cannot control, such as rising interest rates and oil price volatility, funding available via securitization is based primarily on the characteristics and operating performance of the assets themselves. As solar assets continue to develop strong operating performance history, and as access to standardized data on asset performance increases, yields on solar ABS deals will trend downward.

The State of the Solar Securitization Market

There have been five priced securitization deals in the solar space to date. These asset backed securities, backed by PPAs and solar leases, have all been offered under Rule 144A, and as such are private placement deals available to Qualified Institutional Buyers. A sixth deal from AES Distributed Energy was announced in September, but has yet to price. The AES deal will be the first solar ABS deal sponsored by a utility company. 

Additionally, SolarCity recently structured its fifth securitization backed entirely by solar loans, a first for the industry. The transaction consists of two classes of notes (rated BBB and BB for the A and B tranche, respectively, by Kroll Bond Rating Agency), and is backed by a pool of 11,583 solar loans. As system costs decline and solar loans gradually replace third-party financing, we expect this to be the first of many solar securitizations backed by pools of loans.

A comparison of all transactions priced to date is provided in the table below. 


Note: ADSAB is the aggregate discounted solar asset balance.

As solar installations increase and portfolios grow, the size of transactions will continue to increase, making entrance into the public registered ABS market more economical for issuers.  Likewise, as institutional investors become more comfortable with solar as an asset class, one can expect to see more demand for these securities in both the private and public markets.

Risks of Investing in Solar

Solar ABS investors must take into consideration two types of risk. The first is contract risk. When off-takers (the entities that ultimately consume and/or purchase the solar energy) default, those that eventually renegotiate do so at a lower rate, which decreases cash flows to the solar company, and, by extension, to ABS investors. To date, solar companies have experienced nearly negligible default rates: in its 2014 annual report, SolarCity reported an annual default rate of only 0.6 percent.

However, due to regulatory changes to existing rate structures, solar companies can expect this renegotiation risk to increase as off-takers are faced with lower rates from utilities. An example of regulatory change driving increased renegotiation risk is the utility rate reform in California. In July of 2015, the California Public Utilities Commission modified its existing rate structure by reducing electricity rates for households that make up the majority of solar customers in the state. This rate reduction decreases the economic value proposition of solar, which is based on providing electricity at rates below utility rates. Solar ABS investors will have an interest in accurately and rigorously analyzing the risk that default and contract renegotiation pose.

The second risk that solar ABS investors must thoroughly understand is performance risk. There are two primary ways in which asset performance affects cash flows. The first is the panel efficacy, which directly impacts available cash flows: the more powerful the panels, the more energy they are able to produce, and thus the more cash flow is available to investors. This is measured in the industry by degradation, the rate at which the capacity of the panels declines over time. Although the industry standard for degradation is 0.5 percent per year, investors will likely want to stress this number in a more sophisticated fashion across a portfolio of solar assets.

The second factor associated with performance risk is weather. Seasonality and unexpected weather events can substantially impact project cash flows, and investors may want to assess this risk by stressing exceedance probabilities. Weather impacts portfolios differently based on geography and seasonality, and we expect investors will not find it sufficient to simply apply static “base case” (P50) or “conservative” (P90) assumptions across geographically diverse assets. Power generation scenarios in solar are typically measured in terms of exceedance probabilities, which define the probability of a given event being "exceeded." For example, a "P90" scenario describes a case in which the anticipated amount of power generation is expected to be exceeded with a probability of 90 percent.

Conclusion

The tremendous growth in the solar industry in recent years faces a potential setback as the ITC, which has played a critical role in the industry’s growth, begins to decrease in 2019. Capital sources which depended on a 30 percent ITC will have to be replaced with alternative funding sources in order for the solar sector to continue its growth trajectory. While yieldcos and securitization have both recently become common financing alternatives to tax equity, we expect that the challenges facing the yieldcos will likely result in securitization’s emergence as the most viable financing mechanism to fuel continued growth in the solar industry. 

Look for Part 2 of SFIG's Spotlight on Solar Series, to be published in January: A Comparative Analysis of Solar ABS Deal Structures.

 
 
INDUSTRY JOBS

SFIG currently has two open positions for:

  • Communications and Media Manager: will be an integral member of SFIG staff, providing support across the whole organization and serving as a vital link between SFIG, its membership and other external audiences. Additional information on the position, as well as a link to the application, is available here.
     
  • Executive/Administrative Assistant: will be responsible for supporting the Executive Director and Directors of Policy and Advocacy while directing overall front office activities, including the reception area, mail, calendar coordination, meeting set-up, purchasing requests and overall office management. Additional information on the position, as well as a link to the application, is available here.

Some of the latest industry positions available include:

JOB TITLE   COMPANY POSTING DATE
Head of US Primary Structured Credit Ratings   Moody’s Corporation 11-18-15
Associate Analyst 2   Moody’s Corporation 11-02-15
Senior Vice President, RMBS Monitoring   Moody’s Corporation 11-02-15
Vice President, Senior Credit Officer   Moody’s Corporation 11-02-15
CLO Legal Analyst   Moody’s Corporation 11-02-15
Lead Ratings Analyst – Asset Backed Securities Group (Student Loans)   Moody’s Corporation 11-02-15
High Yield - Legal Analyst   Babson Capital Management 10-22-15
Finance Associate   Hogan Lovells US LLP 10-09-15
Attorney - Securitization   Ford Motor Credit Company 9-29-15

Please visit our Jobs page for a full listing of available positions.

For questions about positions at SFIG, please contact Jobs@sfindustry.org. For questions about the website jobs portal, please contact Website@sfindustry.org.

 
 
SFIG CALENDAR
MEETINGS
WEEKLY CREDIT CARD ISSUER COMMITTEE CALL
  • THURSDAY, December 17, 2015
    10:00 a.m. -11:00 a.m. (EST)
 
 
LEGAL COUNSEL COMMITTEE CALL

THURSDAY, December 17, 2015
12:00 p.m. – 1:00 p.m. (EST)

 
 
RESIDENTIAL MORTGAGE ISSUER SUBCOMMITTEE CALL 

MONDAY, January 11, 2015
2:00 p.m. – 3:00 p.m. (EST)

 
 
EVENTS
SFIG & IMN's ABS VEGAS 2016 CONFERENCE

SUNDAY, February 28, 2016 – WEDNESDAY, March 2, 2016
The Aria Resort & Casino
Las Vegas, NV
Registration is available here.

 
 
ADVOCACY OUTLOOK

If you would like to participate in the work SFIG is undertaking through our committees as highlighted below, please e-mail Committees@sfindustry.org. For specific inquiries on any of SFIG’s advocacy efforts, please contact the staff member listed for the related project.

SFIG’s Marketplace Lending Committee was established in August 2015, as an SFIG participant committee and is open to all SFIG members who have a legitimate interest in marketplace lending. The committee was formed with two primary intentions: 1) to work with members involved in marketplace lending to educate the industry as a whole, with a particular focus on the securitization of assets generated through that lending channel; and 2) to determine appropriate securitization-specific policy and engage in related advocacy, leveraging SFIG’s prominence and experience across all asset classes to support the continued responsible growth of securitization in marketplace lending. For its first initiative, the committee commented on the Treasury Department's Request for Input on Online Marketplace Lending. The comments were submitted on September 30th and drafted by counsel at Chapman and Cutler LLP.

Members interested in participating should contact Amanda.Bateman@sfindustry.org.

SFIG’s Student Loan Committee will be responding to Fitch’s proposed amendments to FFELP student loan ABS rating methodology. The committee also recently responded to the Proposed Changes to Moody’s Approach to Rating Securities Backed by FFELP Student Loans.

To join SFIG’s Student Loan Committee and learn more, please contact Alyssa.Acevedo@sfindustry.org.

The RMBS 3.0 Task Force released its Third Edition RMBS 3.0 Green Papers in November 2015. The task force has continued its efforts to address key issues specific to private label mortgage securities through work-streams relating to (1) Representations, Warranties, and Repurchase Enforcement; (2) Due Diligence, Data, and Loan-Level Disclosure; and (3) Role of Transaction Parties and Bondholder Communications. We encourage members to participate in any or all of the working groups to contribute towards the mission of RMBS 3.0. For its 2016 agenda, the task force will address topics including the inclusion of an independent Deal Agent in transactions, Bondholder Communications, Data and Loan-Level Disclosure, Repurchase Enforcement, and Settlements, as well as undertake a review of the previously published Green Papers.

For additional information on RMBS 3.0, please contact Amanda.Bateman@sfindustry.org.

SFIG, through its GSE Reform Task Force, along with several other trade associations, submitted a letter to the FDIC, Fed and OCC regarding the effect of homeowner’s association ‘super-liens’ on private-label RMBS and whole loan transactions. The task force also submitted comments on FHFA’s update to the single security initiative on October 7, 2015. The task force is expecting to receive an update from the SFIG participants on the Industry Advisory Group for the Common Securitization Platform and Single-Security following its second meeting on December 7th. The task force has also formed policy positions on the Carney-Delaney-Himes GSE Reform bill and updated its briefing book to support its advocacy efforts. With the release of the bill, SFIG staff also updated its GSE Reform Legislative Comparison, which analyzes key provisions in the five most recent housing finance reform bills including the Johnson-Crapo bill and the PATH Act. Additionally, the task force will continue to engage the Federal Housing Finance Agency on its Single-Security proposal, guarantee fee pricing and Strategic Plan for 2015-2019.

To join SFIG’s GSE Reform Task Force and learn more, please contact Amanda.Bateman@sfindustry.org.

The Mortgage Loan-Level Disclosure Task Force is studying the recent Regulation AB II release of Schedule AL and comparing it to SFIG’s Schedule L submission to the Securities and Exchange Commission in February 2014. SFIG also continues to have weekly Mortgage Industry Standards Maintenance Organization calls to go through data elements that lenders should deliver in securitizations. The task force will also be conducting an analysis of the data elements included in SFIG’s Schedule L submission in order to determine any privacy concerns.

Please contact Alyssa.Acevedo@sfindustry.org for additional information on SFIG’s work on this topic.

The Volcker Task Force has been working with SFIG’s various asset class and legal counsel committees to identify areas within the Volcker Rule in need of clarification, particularly questions regarding covered funds and the loan securitization exemption.

Please contact Amanda.Bateman@sfindustry.org to participate on the Task Force.

The Risk Retention Industry Guide Working Group is creating best practices and developing consensus positions around several areas within the Credit Risk Retention final rule.

Please contact Alyssa.Acevedo@sfindustry.org with any questions.

SFIG’s Chinese Market Committee continues to hold discussions with a focus on SFIG’s partnership with the Chinese Securitization Forum, potential upcoming educational discussions and the sharing of recent market developments in China.

If you would like more information on SFIG’s work with respect to Chinese securitization, please contact Alyssa.Acevedo@sfindustry.org.

SFIG’s Shadow Banking Task Force has established the following agenda:

  • Leverage the predictive powers of the G20’s shadow banking initiative to determine future SFIG advocacy initiatives
  • Assess the level of regulation to which our members are already subject
  • Measure the full impact of those regulations on lending decisions and business models
  • Provide input into IOSCO, BCBS and IAIS on the revitalization of securitization markets

To register your interest in SFIG’s Shadow Banking Initiative, please contact Amanda.Bateman@sfindustry.org.

The Regulation AB II Task Force will focus on the disclosure and offering process requirements within the final rule. Two work streams have been formed to develop a comment letter on the proposed rules that remain outstanding and to produce an industry guide for critical elements of the final rule.

SFIG members who are interested in joining this task force or asset specific committees should contact Alyssa.Acevedo@sfindustry.org.

The Regulatory Capital and Liquidity Committee is addressing industry concerns related to the Federal Reserve Board’s Final Rule on the Liquidity Coverage Ratio (“LCR”). This committee will also develop a comment letter when U.S. regulators release their proposed Net Stable Funding Ratio (“NSFR”).

To become involved in SFIG’s advocacy on the final LCR or NSFR rules, please contact Alyssa.Acevedo@sfindustry.org.

The Derivatives in Securitization Task Force obtained no-action relief from the CFTC giving swap dealers comfort that the CFTC would not take enforcement action against swap dealers that did not comply with certain CFTC Regulations when taking actions in response to the credit ratings downgrade of a counterparty to a legacy swap. The relief applies to swaps with SPVs that were in existence prior to October 10, 2013. The task force also commented on the CFTC’s proposal on margin requirements for uncleared swaps, as well as the prudential regulators’ proposal regarding margin and capital requirements for covered swap entities.

SFIG members who are interested in learning more about this initiative should email Amanda.Bateman@sfindustry.org.

The Money Market Fund Reform Working Group submitted a comment letter on October 13, 2014 regarding the Securities and Exchange Commission’s July 23, 2014 proposal which includes, among other things, possibly amending rule 2a-7’s issuer diversification provisions to eliminate an exclusion that is currently available for securities subject to a guarantee issued by a non-controlled person. SFIG also submitted a comment letter in September 2013 on Money Market Fund Reform.

If you are interested in joining this working group, please contact Alyssa.Acevedo@sfindustry.org.

The High Quality Securitization ("HQS”) Task Force responded to the European Commission’s consultation on an EU framework for simple, transparent and standardized securitization on May 12, 2015. The task force also previously responded to the BCBS-IOSCO consultation on its criteria for identifying simple, transparent and comparable securitizations. SFIG’s comments were built off of those sent to the European Banking Authority on January 14th (available here) regarding its proposed criteria and to the European Central Bank and Bank of England last summer (available here) regarding the development of a sustainable securitization market in Europe.

To join the HQS Task Force, please contact Amanda.Bateman@sfindustry.org.

 
 
INDUSTRY NEWS HIGHLIGHTS
CFTC VOTES ON MARGIN FOR UNCLEARED SWAPS FINAL RULE

This afternoon, December 16th, the U.S. Commodities Futures Trading Commission (“CFTC”) approved their final rule regarding margin requirements for uncleared swaps by a vote of 2-1.

In late October, the prudential regulators approved a Joint Final Rule on Swap Margin Requirements. This joint rule was issued by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Farm Credit Administration and the Federal Housing Finance Agency and applies to entities supervised by any of these agencies.

SFIG previously advocated for securitization special purpose vehicles (“SPVs”) to qualify as “low risk financial end users,” presented criteria for such an exemption and highlighted the impact the rules would have on the securitization industry. SFIG members and staff also met with Congressional staff this past October to discuss the rule's applicability to almost all SPVs and the impact on the financing activities of consumer lenders who extend credit in major asset classes, such as credit cards, auto loans and equipment leases.

Once the final rule has been published by the CFTC, we will circulate it to our Derivatives in Securitization Task Force. If you are interested in joining this task force, please contact Alyssa Acevedo

 
 
CONGRESSMEN ROYCE, SEWELL INTRODUCE BILL TO PROVIDE COMPETITION BETWEEN CREDIT SCORE PROVIDERS

Last Thursday, December 10th, Congressman Ed Royce (R-CA) and Congresswoman Terri Sewell (D-AL) introduced H.R. 4211, the Credit Score Competition Act of 2015. The bill enables Fannie Mae and Freddie Mac to use multiple credit scoring models to evaluate a mortgage purchase decision.

“The GSEs’ use of a single credit score is an unfair practice that stifles competition and innovation in credit scoring. Breaking up the credit score monopoly at Fannie and Freddie will also assist them in managing their credit risk and decreases the potential for another taxpayer bailout,” stated Congressman Royce.

 
 
U.S. OFFICIALS SKEPTICAL OF E.U. ABS REVIVAL PLANS

U.S. officials have stated that the European Union’s (E.U.) plan to revive their ABS market is too geographically limited and may pose unnecessary risks to financial stability, according to a recent Bloomberg article.

The E.U. has proposed easing the capital requirements on “simple, transparent and standardized” (“STS”) securitizations in order to encourage lending to small businesses by giving banks more options for funding loans.

According to the article, U.S. officials believe that lowering standards on plain vanilla ABS poses more of a threat to financial stability than raising them for riskier products. While the officials are sympathetic to E.U. efforts to boost capital markets and reduce companies’ dependence on bank loans, they believe it is unclear why the preferences would only apply if all issuers and other connected firms are based in the E.U.

SFIG’s High Quality Securitization (“HQS”) Task Force has responded to several HQS proposals, including the European Commission’s consultation on an EU framework for STS securitizations in May and the BCBS-IOSCO consultation on its criteria for identifying simple, transparent and comparable securitizations. If you would like to join the HQS Task Force, Jennifer.Wolfe@sfindustry.org

 
 
CONGRESS REACHES AGREEMENT ON FEDERAL BUDGET, TAX EXTENDERS PACKAGE

This morning, House Speaker Paul Ryan (R-WI), announced that bipartisan deals had been reached on a bill to extend certain tax breaks as well as to fund the government.

H.R. 2029, the Consolidated Appropriations Act of 2016 and the Protecting Americans from Tax Hikes Act of 2015 contains a few provisions important to the structured finance industry:

  1. Eminent Domain – Contains an SFIG supported provision that prevents the Federal Housing Administration, Government National Mortgage Administration, or Department of Housing and Urban Development from facilitating the use of eminent domain in order to seize securitized mortgage loans for the purposes of modification.
  2. Jumpstart GSE Reform – the bill (1) explicitly prohibits the sale, transfer, liquidation, relinquishment, or divestment of the Department of Treasury’s senior preferred stock holdings in the GSEs without legislative action which sunsets on January 1, 2018.  This may serve as a lever to push legislative action on full GSE reform during the next Congress.
  3. Making Home Affordable (“MHA”) – Ends new modifications under the MHA program as of December 31, 2016.
  4. Mortgage Insurance Premiums (“MIPs’) – MIPs can be deducted for taxpayers with up to $110,000 in adjusted gross income through 2016.
  5. Mortgage Servicing Assets Capital Review (“MSAs”) – requires the prudential regulators to conduct a joint study to determine the proper capital requirements for MSA’s.
  6. Real Estate -
    1. Increases the rate of withholding tax on disposition of U.S. real property interests from 10% to 15% that doesn’t apply to the sales of personal residences where $1M or less is realized; and
    2. Interests in Regulated Investment Companies (“RICs”) and Real Estate Investment Trusts (“REITs”) are not excluded from the definition of real property interests even under a cleansing rule
  7. Solar Investment Tax Credit (“SITC”) – The SITC will be extended to 2019 at the current 30% level, 26% in 2020, 22% in 2021 and then is set to 10% permanently thereafter.
  8. Student Loan Servicing - Provides $1.6 billion in funding for the Student Aid Administration, an $155 million increase over the previous year’s funding. However, the $155 million is required to be allocated based on the quality of servicing and borrower outcomes rather than by the current formula.

The text and summary of the tax extenders provisions to H.R. 2029 can be found here and here.  The text of the government funding provisions of H.R. 2029 can be found here.

 
 
THREATS TO FINANCIAL STABILITY HAVE HEIGHTENED

On December 15, 2015 the Office of Financial Research published its first Financial Stability Report which stated that threats to financial stability have heightened over the past year. According to OFR Director Richard Brenner, “We see elevated and rising credit risks in U.S. nonfinancial business and in emerging-market economies, the continued reach for yield in a climate of persistently low interest rates, and the uneven resilience of the financial system.” Among the areas of concern highlighted in the report include rising credit risk levels for nonfinancial businesses and emerging markets; persistently low interest rates; the “uneven” resilience of the financial system post-crisis, including threats from new vulnerabilities; concentrated risk among counterparties for over the counter derivatives clearing; the need for improvement in derivatives data reported to registered swap data depositories; and the unintended consequences of enhanced capital and leverage requirements, which may increase incentives for risk-taking by large, complex banking firms.

Important to SFIG members, the report also covers the mortgage market, including private-label residential mortgage-backed securities (“RMBS”), government-Sponsored Enterprise (“GSE”) RMBS, and leveraged loans.  From a policy front, the report covers the potential unintended consequences of regulatory policy on changes to bank capital and liquidity, including the Volcker Rule, leverage ratio and Basel III

The Financial Stability Report is the first of its kind published by the OFR and supplements and precedes the 2015 Annual Report to Congress which will be published in January.

 
 
CMBS ISSUANCE EXPECTED TO LEVEL OFF

The CMBS market has followed an upward trajectory over the last several years from $2.7 billion in U.S. issuance in 2009, and is expected to reach a peak this year of $100 billion, according to an article in National Real Estate Investor. A current forecast from Trepp LLC calls for $111 billion in loan maturities in 2016 and $116 billion in 2017, followed by a sharp drop to $21.2 billion in 2018. “We expect the next two months to be very, very busy as people look to continue to lock in low rates and finish their refinancing this year. But certainly at some point over the next 12 months you will see issuance start to level off as that big block of 2006 and 2007 loans have been cleared,” said Manus Clancy, senior managing director at Trepp.

In addition, widening spreads are also receiving a lot of focus right now as the spread on BBB- has increased by about 140 points and rates on CMBS loans for borrowers are up about 50 to 75 basis points from earlier this year. Another factor that will influence CMBS lending activity in 2016 is risk retention and other regulations that will come into play next year. 

 
 
CALIFORNIA REGULATOR REQUESTS INFORMATION FROM MARKETPLACE LENDERS

The California Department of Business Oversight announced an inquiry into online marketplace lenders on December 11, 2015. According to an article in American Banker, a press release from the Department of Business Oversight did not disclose which companies will receive the request. The article quotes Tom Dresslar, spokesman for the department, in saying that “responses from the companies on the list should give the agency an understanding of the size of the marketplace lending sector and also how various business models work.” The article outlines that the “regulators are seeking information from a broad swath of firms — including consumer lenders, small-business lenders, and even companies that are not primarily in the lending business — as they start to examine the marketplace lending industry.”

According to the department’s press release, the request has two main objectives: “to assess the industry’s size in California and how many consumers and businesses it touches, and to better understand various loan and investor funding programs used by marketplace lenders.” The department sent the survey, which requested “five-year trend data about their loan and investor funding programs,” to fourteen companies. Responses are due March 9, 2016.

 
 
CMBS POOLS DROP LOANS

According to Fitch Ratings in an article by National Mortgage News, CMBS pools are increasingly dropping loans before transaction closing.  From June 2014-June 2015, approximately 1,000 loans were removed from the 28 CMBS deals rated by Fitch. In a press release Fitch indicated that “the numerous loan drops could indicate a lack of lender due diligence prior to sending the initial loan information to ratings agencies.” While most of the loans dropped from the deals Fitch analyzed were for less than $20 million, if the size of the loans increases Fitch said it could have more significant impact on deal metrics.

 
 
SFIG COMMITTEES AND TASK FORCES

SFIG has a number of Committees and Task Forces meeting and working on many topics of interest to the securitization industry. Please email us for more information, including how to join.

SFIG is pleased to share this edition of its newsletter with our members, as well as our supporters in the structured finance community. To ensure that you receive future editions of the newsletter, please visit our website or email us to learn more about membership opportunities.

Contact Information

Richard Johns Executive Director

Kristi Leo Investor Relations

Sairah Burki Senior Director, ABS Policy

Michael Flood Director, Advocacy

Dan Goodwin Director, Mortgage Policy

Jennifer Wolfe ABS Policy Manager

Mary Robinson Policy Manager

Alyssa Acevedo Senior Analyst, ABS Policy

Amanda Bateman Policy Analyst

Daniel Tees Policy Analyst

Jennifer Serpas Office Manager

Sarah Clarke Executive Administration

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