January 27, 2016 Newsletter
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January 27, 2016
 
 
SFIG News

Issue Spotlight

Industry Jobs

SFIG Calendar

Meetings

Events

Advocacy Outlook

Industry News Highlights

 
SFIG NEWS
SFIG MARKETPLACE LENDING COMMITTEE LAUNCHES “BEST PRACTICES” INITIATIVE

Following the launch of SFIG’s Marketplace Lending Committee in summer 2015, and its subsequent September 30th response to the Treasury Department’s Request for Input, the Committee’s agenda will now advance to the establishment and documentation of recommended market best practices.

The initiative is rooted in the Committee’s core mission, which is to support the responsible growth of securitization in the marketplace lending sector.  As stated in our September comment letter, “while we expect industry standards to evolve for this market, we firmly believe that for the various asset classes involved there are comprehensive sets of regulation and industry standards already in place”.

The best practices initiative will seek to identify a framework of such regulations and standards and work methodically to identify gaps in application or understanding with a view to establishing industry consensus and providing recommendations around one or multiple accepted approaches.  The initiative will demonstrate the industry’s commitment to effective self-regulation and may impact the scope and content of future regulatory proposals.

Our initial work-stream will focus on loan/pool level disclosure and reporting.

We will be holding a kick off call during the week of February 8th. To register for the Marketplace Lending Committee and to secure an invitation to the upcoming call, please contact Jennifer.Wolfe@sfindustry.org

 
 
ABS VEGAS 2016 IS QUICKLY APPROACHING

A reminder to register for SFIG and IMN’s ABS Vegas 2016 conference, taking place February 28 - March 2, at the Aria Resort & Casino in Las Vegas. With 150 corporate sponsors and over 4,100 registrants so far, the 2016 program is shaping up to be the largest gathering yet!

The three-and-a-half day program has been developed by leaders within the structured finance industry representing the full spectrum of industry participants including investors, issuers, financial intermediaries, regulators, law firms, accounting firms, technology firms, rating agencies, servicers, and trustees.

View Full Agenda

SFIG members receive special discounted rates off registration and sponsorship.

Reserve your place today!

For sponsorship information, please contact Christopher Keeping at +1 212.901.0533 or ckeeping@imn.org.
 
 
GENERAL REGISTRATION OPENING TOMORROW FOR WiS AT ABS VEGAS 2016

WiS is extending the invitation to join female colleagues at the ABS Vegas 2016 WiS event, Winning Outside the Workplace.  While registration is filling quickly, we’ve expanded our ability to welcome additional industry members to learn about leveling the playing field outside of the board room with educational insight on wine pairings, gaming, and social engagement.

Priority registration is open to all WiS members, but will open to all attendees of ABS Vegas 2016 on Thursday, January 28th.  If you are a WiS member and have not registered to attend, make sure to reserve your spot today!

To support WiS and take advantage of all of the benefits available to our sponsors and be included in ABS Vegas materials, submit your WiS sponsorship form by February 5th. Please complete the sponsorship form and email it to sponsorship@sfindustry.org.
 
 
SFIG WELCOMES OUR NEWEST STAFF MEMBER

Hua Liu will join SFIG on February 1st as the Communications and Social Media Manager, developing, managing, and implementing strategies to expand the reach of SFIG's online communications via social media, email newsletters, and the SFIG website.

Most recently, Hua worked at the Kissinger Institute at the Woodrow Wilson International Center for Scholars, where she demonstrated creative leadership of the program's communication projects, including managing social media channels and websites, as well as coordinated public programs, research, and publications.

Before joining the Wilson Center, she was a Web and Digital Coordinator with the Chinese Branch of Voice of America. She provided daily support to the website and through social media and multimedia channels. She also served as the Communications and Program Associate at the Asia Society in D.C., managing the Greater China program series and overseeing the Society's media relations and social media efforts.

Hua received an M.A. in Public Communication from American University. She graduated from Wuhan University in her native China with a B.A. in English Literature and a B.A. in International Finance.

 
 
ISSUE SPOTLIGHT

Spotlight on Solar Series, Part 2: Market Trends and Structural Evolution

By: T-REX Group

Look for Part 3 of SFIG's Spotlight on Solar Series in February: Quantifying and Assessing Renegotiation and Rate Risk

Solar Industry Background

The solar industry has experienced significant growth in the past 15 years (a compound annual growth rate of nearly 70%), fueled by multiple factors including business model innovation, declining system costs, and the investment tax credit (“ITC”). At the end of 2015, the solar industry faced a period of great uncertainty, as the ITC was slated to expire in just over a year. That uncertainty was eliminated this past December with the extension of the ITC by Congress, and the solar industry stands to gain tremendously from the extension. In this piece we discuss this extension, the effect it will have on sources of financing in the industry, and how all of these pieces will affect the nascent solar ABS market.

Market Update: ITC Extension and the Impact on Industry Growth

December 2015 was an important month for the solar industry. The ITC, which was previously slated to drop to 10%, was extended through 2021 with the following schedule.

Note: in 2022, the rate drops to 10% for non-residential and third party owned residential systems, and to 0% for host-owned residential systems.

In addition to the rates of the tax credit in the ITC, there are two other very important elements in the recent legislation. The first is the renewal of bonus depreciation, which allows for accelerated depreciation in the early years of a project’s life. Bonus depreciation was extended such that projects that come online before 2018 get 50%, projects in 2018 get 40%, and projects in 2019 get 30% in accelerated depreciation. Finally, a “commence construction” clause was introduced that allows the ITC to be claimed once construction for the project has begun, as opposed to when the project comes online.

The impact of the ITC extension and supplementary clauses on the industry is expected to be substantial. By 2020, GTM Research predicts that annual U.S. solar installations will reach 20 gigawatts (“GW”)—nearly twice what levels would have been without the extension. The two graphs below show forecasted annual U.S. solar installations, with and without the forecasted ITC extension.

Solar Loans

The solar industry’s recent growth has also been fueled by multiple factors aside from the ITC, including financial model innovation through the rise of third-party financing. Through vehicles such as the power purchase agreement (“PPA”) and solar lease, residential and commercial customers have been allowed to bypass the substantial upfront cost of purchasing a solar system by avoiding ownership of the systems. However, as system costs decline and homeowners take advantage of the extended ITC, direct ownership of solar panels is expected to increase through the proliferation of solar loans. The following graph from GTM Research shows the rise of solar loans vs. leases and PPAs (third-party ownership, or “TPO”). In 2020, more systems are forecasted to be owned rather than leased as loans capture 54% of the market, with TPO models comprising the remaining 46%.

These forecasts were made prior to the extension of the ITC. As homeowners are able to take advantage of the ITC, effectively lowering the costs of solar ownership even more, loans could overtake TPO even sooner than 2020.

One example of a solar loan product is SolarCity’s MyPower loan for residential solar customers. MyPower loans are fundamentally different from more traditional loans, such as mortgages, under which level payments are due each month. With the MyPower loan, monthly payments are not fixed, but are tied to the power generated by the system. The loan is structured to amortize in 30 years, although the amortized amount depends on how much power the system produces. Because the payments are tied to power generation, there is the potential for variability in the borrower’s loan payments. The loans can pay off faster if there is over production. Or, if the power produced is not sufficient to make the payment each period, then it is possible that the loan can take longer than the initial term to amortize. In the case that the loan is not repaid in 30 years, the customer will have 2 additional years to pay off the balance. After 2 years, it would be the borrower’s responsibility to pay the remaining balance if there is any balloon payment due.

MyPower customers pay a kWh rate towards their monthly loan payment with an annual escalator of 0-2.9%. In this sense, the loans are very similar to PPAs, with payments tied to power production. Because the payments to ABS investors are ultimately derived from the power production of the assets, it is important that investors have the ability to evaluate and monitor the performance of the loan portfolio through running sensitivity analysis on the power production of the underlying systems. Furthermore, investors must also assess other parameters that affect portfolio cash flows, such as renegotiation and default due to rate risk in the market. This will be the subject of our third installment in the solar series.

Borrowers pay a fixed interest rate – by way of example, the weighted average loan rate was 4.9% in the SolarCity 2015-A transaction. If the borrower’s system does not produce enough power to meet the current interest payment, any unpaid interest is not capitalized but accrued to be paid in future periods. The loan structure allows the borrower to take advantage of the ITC benefit, allowing the borrower to use the resulting tax savings to pay down principal and lower future monthly payments. The borrower is required to pay a balloon payment on June 1st of the year following installation to take advantage of the ITC.

SolarCity 2015-A Securitization

Although the solar ABS market is still developing, the impact of loan proliferation is already evident in the most recent solar securitization: SolarCity 2015-A. This deal is backed by a pool of solar loans, whereas all previous solar ABS deals were backed by leases and PPAs. A summary of the collateral pool, comprised of MyPower loans, is provided in the table below.

The following table compares the key features of all solar ABS transactions, including SolarCity’s recent loan-backed transaction 2015-A which priced on January 13, 2016:

The solar ABS market has had a number of meaningful developments, including the presence of a variety of tax equity structures. In SolarCity’s first two transactions, the systems were owned by SolarCity. This changed with 2014-2, which incorporated the inverted lease tax equity structure into the transaction. In an inverted lease structure, the developer owns the project and enters into a lease with the investor, who then enters into an agreement with an off-taker. Once the lease has completed, the investor exits from the deal, and the developer receives payments directly from the off-taker. SolarCity’s first transaction in 2015, 2015-1, featured the partnership flip tax equity structure in the transaction. In the partnership flip structure, there is the risk that tax equity investors must potentially forego a portion of the tax benefits during the recapture period. This risk was mitigated through an innovative insurance policy in the structure would cover up to 35% of the ITC for the tax equity investor. As solar ABS investors become more comfortable with tax equity, we expect to see more creative structuring solutions to mitigate some of the risks posed by complicated tax equity structures.

Another meaningful development in the solar ABS market is the nature of the underlying collateral. In SolarCity’s most recent transaction, the collateral base is different from that in previous solar securitizations, in that the cash flows are backed not by solar leases or PPAs, but entirely by SolarCity’s MyPower loans. Not only is this a reflection of financing trends in the industry, but it is also significant because it is the first time that the industry has seen solar loans of any form in an ABS structure. It is also noteworthy that two rating agencies rated the A tranche in 2015-A (as opposed to only one in previous deals), which is a sign that solar is gaining awareness in the esoteric ABS space.

The most striking data point on SolarCity’s most recent transaction is the increase in yields from previous deals. On SolarCity’s previous securitization in August of 2015, the yields on the A and B classes were 4.18% and 5.58%, respectively. There are multiple explanations for the increase in yields in 2015-A to 5.00% for Class A and 10.00% for Class B. First, the deal priced during a period of heightened volatility in financial markets. ABS spreads, particularly in credit, are wide across the market. This is magnified by the fact that this transaction is the first of its kind—there has never been a solar loan ABS securitization. Additionally, ratings on Class A for the loan deal are BBB, versus the A rating on the previous lease deal, and the Class B on 2015-A carries a BB rating, versus BBB on 2015-1. Investor concerns with long-dated esoteric assets also adversely impacted this transaction.

As investors become more comfortable with solar loans, we expect to see more deals with loans as the underlying collateral in the structure. As a result, the base of issuing companies will diversify to include regional banks lending to solar developers. With the extension of the ITC, it is also likely that tax equity will play a larger role in the capital structure of solar ABS deals.

New Regulatory Risk: Rate Risk

Another factor which may have impacted spreads on SolarCity’s loan deal is investor discomfort with recent regulatory uncertainty facing SolarCity and the entire industry. Changes to net metering rates in Nevada essentially brought the state’s residential solar industry to a halt. As net metering rates decline, the value proposition to solar customers is diminished, which threatens the business of solar developers. Regardless of the fact that this transaction was not tied directly to Nevada—in fact, 95% of the loans are in California, Colorado, and Arizona—the concern may be that Nevada has potentially set a precedent. However, due to the rapidly growing number of jobs provided by solar companies, it is not likely that such drastic actions will become common in states where solar has a strong presence in the market. This is particularly true in light of the substantial extension of the ITC, which is expected to fuel job growth in the industry.

Conclusion

The extension of the ITC will drive incredible growth and further cost reductions in the solar industry. As solar becomes more affordable for residential consumers, and loans become the primary source of financing in the industry, we expect to see solar ABS backed increasingly by loans. However, as is evident with 2015-A, regulatory risks and rate reform concerns are impacting the ratings and pricing of solar securitizations. In order to become more comfortable with rate risk, investors must know how to quantify it accurately. In our next piece, we will look at rate risk in-depth and provide a comprehensive analysis on how to assess and quantify this risk.

 
INDUSTRY JOBS

SFIG currently has open positions for:

  • Advocacy Manager: will be an integral member of SFIG staff, being second-in-command of the association’s Advocacy department.  The successful candidate will design and execute advocacy strategies for SFIG’s policy priorities and support the association’s advocacy efforts through development and growth of its political action committee (“PAC”).  Additional information on the position, as well as a link to the application, is available here.

  • Data/Policy Analyst: will help support group-wide strategy efforts and initiatives as they relate to the association’s database and various policy requirements. The Analyst will also support SFIG’s advocacy efforts through development of a political action committee database. 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

Structured Finance Analyst

 Assured Guaranty 01-19-2016

Associate Director/Director, Asset Backed
Securities

Fitch Ratings 01-12-2016

Associate Director/Director, Residential
Mortgage Backed Securities

Fitch Ratings 01-07-2016
Associate Director, ABS Ratings Standard & Poor's 01-07-2016
Analyst Moody’s Corporation 12-15-2015
Associate Analyst Moody’s Corporation 12-15-2015
AVP - Analyst Moody’s Corporation 12-15-2015
VP – Senior Analyst Moody’s Corporation 11-02-2015
High Yield - Legal Analyst Babson Capital Management 10-22-2015
Finance Associate Hogan Lovells US LLP 10-09-2015

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 CALLS
  • THURSDAY, January 28, 2016
    10:00 a.m. – 11:00 a.m. (EST)
  • THURSDAY, February 4, 2016
    10:00 a.m. – 11:00 a.m. (EST)
 
 
CHINESE MARKET COMMITTEE CALL 

FRIDAY, January 29, 2016
10:30 a.m. - 11:30 a.m. (EST)

 
 
FINANCIAL INTERMEDIARY COMMITTEE CALL 

FRIDAY, January 29, 2016
11:00 a.m. - 12:00 p.m. (EST)

 
 
BIWEEKLY AUTO ISSUER COMMITTEE CALL

WEDNESDAY, February 3, 2016
2:00 p.m. - 3:00 p.m. (EST)

 
 
MONTHLY RESIDENTIAL MORTGAGE ISSUER SUBCOMMITTEE CALL

MONDAY, February 8, 2016
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.

 
 
WiS ABS VEGAS - WINNING OUTSIDE THE WORKPLACE

SUNDAY, February 28, 2016 
3:00 p.m. - 5:00 p.m. PT
The Aria Resort & Casino
Las Vegas, NV

 
 
SFIG & IMN's STRUCTURED FINANCE CANADA 2016

TUESDAY, May 31, 2016 – WEDNESDAY, June 1, 2016
Hyatt Regency Toronto
Toronto, Ontario
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 Alyssa.Acevedo@sfindustry.org.

SFIG’s Student Loan Committee recently responded to Fitch’s proposed amendments to FFELP student loan ABS rating methodology. The committee also submitted a response to the Proposed Changes to Moody’s Approach to Rating Securities Backed by FFELP Student Loans this past October.

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; (3) Role of Transaction Parties; and (4) 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.

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 Amanda.Bateman@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 Alyssa.Acevedo@sfindustry.org to participate on the Task Force.

The Risk Retention Industry Guide Working Group recently launched its interim Industry Guide, ahead of the RMBS compliance date, focused on issues either relevant to all asset classes or specific to RMBS. The working Group continues to work on a final guide focused on 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.

The Regulation AB II Task Force has been focused on the disclosure and offering process requirements within the final rule. Asset specific work streams have been formed to develop comment letters on the outstanding proposals within the final rule and the Task Force submitted the first part of its comment letter this past June. SFIG submitted a supplemental comment letter covering credit card and equipment floorplan asset classes on January 12, 2016.  Future discussions across asset class committees and the Regulation AB II Task Force will focus on the remaining outstanding proposed rules, including potentially requiring issuers to provide the same disclosure for Rule 144A offerings as required for registered offerings.

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. In October 2015, the prudential regulators approved a Joint Final Rule on Swap Margin Requirements. In November 2015, the CFTC issued their final rule regarding margin requirements for uncleared swaps for swap dealers and major swap participants.

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 Alyssa.Acevedo@sfindustry.org.

 
 
INDUSTRY NEWS HIGHLIGHTS
EBA LAUNCHES PUBLIC CONSULTATION ON IMPLICIT SUPPORT FOR SECURITIZATIONS

On January 20th, the European Banking Authority (“EBA”) opened a public consultation period on draft guidelines regarding implicit support for securitization transactions. The draft guidelines are designed to provide clarification as to an objective test for arms-length conditions to determine when a transaction is not structured to provide support, and sets forward elements of consideration in such an analysis. 

The public consultation period closes on April 20, 2016. 

SFIG plans to respond to the Basel Committee on Banking Supervision's consultation on capital treatment for "simple, transparent and comparable" securitizations through its Regulatory Capital and Liquidity Committee and High Quality Securitization Task Force. To join either of these committees please email Alyssa.Acevedo@sfindustry.org.

 
 
BIS SURVEY: NEW BASEL RULES MAY MAKE TRADING AND MARKET-MAKING MORE DIFFICULT

A recent Bank for International Settlements (“BIS”) survey indicates that new regulations from the Basel Committee on Banking Supervision (“BCBS”) are set to increase costs of capital for government-bond dealers, potentially making trading and market-making more difficult, according to a recent Bloomberg article.

Respondents to the survey, which included 40 banks as part of a BIS study on fixed income market liquidity, expect this capital cost increase when moving from the initial Basel III rules to a fully phased-in Basel III.

According to the BIS study, “Market participants have raised concerns that regulatory reforms, by raising the costs of warehousing assets, have contributed to reducing market liquidity and could be keeping banks from acting as shock absorbers during periods of market stress.”

As SFIG previously reported, BCBS published its final rule relating to the fundamental review of the trading book. Banks are shrinking their bond-trading activities to comply with such rules. According to Bloomberg, these restrictions have reduced banks’ ability to build an inventory of securities that carry risk while monetary policy easing has added challenges for investors to buy or sell bonds without disrupting prices.

“One such challenge is scarcity effects, given that large-scale asset purchases reduce the amount of securities available for trading,” the study said. “A second challenge relates to the risk that valuations may have become predicated on unsustainable expectations of continued monetary policy accommodation.”
 
 
ADMINISTRATION ADVISES FEDERAL AGENCIES TO FINISH "HIGHEST PRIORITY" RULEMAKINGS THIS SUMMER

According to an article in The Hill, on January 17th, the White House Office of Information and Regulatory Affairs (“OIRA”) sent a memo to federal agencies asking them to finalize highest priority rules by this summer to avoid a glut of final rules during the end of President Obama’s term later this year. According to the article, OIRA stated that it understands that agencies will need to issue regulations through 2016, but large regulatory initiatives should be finished well before the end of the year, and agencies should adhere to the deadlines established in the Fall 2015 Regulatory Plan and the Unified Agenda of Federal Regulatory and Deregulatory Actions

Among the rulemakings listed in the Fall Regulatory Plan that are important to the structured finance industry are:

  1. Federal Reserve, OCC and FDIC Proposed Rule - Net Stable Funding Ratio
  2. FDIC Proposed Rule - Treatment of Financial Assets Transferred in Connection with a Securitization Participation
  3. SEC Proposed Rule – Prohibition Against Conflicts of Interest Relating to Certain Securitizations
  4. SEC Proposed Rule – Credit Rating Agencies – Conflicts of Interest

Federal Regulators may also address implementation of Basel’s Final Fundamental Review of the Trading Book rule in 2016 as well.

 
 
MOODY'S: DEVELOPMENT OF DOMESTIC SECURITIZATION MARKETS WILL HELP FINANCIAL INCLUSION IN INDIA AND CHINA

Moody’s Investor Service recently released a report on securitization in India and China entitled, "Securitization - India and China: Securitization Funds NFBC’s Lending to Promote Spread of Financial Inclusion."

As the report states,

[N]on-bank finance companies (“NBFCs”) are key providers of credit to individuals and small businesses that would otherwise have limited access to bank loans or would incur high interest costs for such loans. While there are various funding avenues open to NBFCs in India and China, securitization has proven to be reliable and competitively priced and is therefore an important source of the funds the NBFCs use for lending.

The report also highlights the key difference in the dynamics of how the markets in both countries are evolving. India has regulatory requirements in place that support the uptake of securitization transactions issued by NBFCs whereas such regulatory requirements on the investor-side are absent in China.

“Without such important support from institutional investors, the applicability of securitization in achieving the goal of financial inclusion has not been as widely used in China as in India,” Moody’s states.
 
 
CREDIT RISK TRANSFER PROGRAMS THRIVING

As highlighted in a recent article in DS News, private investors have been taking on more housing market risk through credit risk transfer (“CRT”) programs since Freddie Mac launched the Structured Agency Credit Risk (“STACR”) series in July 2013. Since its inception, Freddie Mac has transferred credit risk on more than $385 billion of principal outstanding in single-family mortgages backed by the government sponsored enterprise (“GSE”) through not only the STACR program but also the Whole Loan Security and Agency Credit Insurance Structure programs. As a result, Freddie Mac’s investor base has grown to approximately 190 unique investors and Freddie’s CR program has raised close to $16 billion to protect taxpayers from future losses due to mortgage defaults.

According to Kevin Palmer, Senior Vice President of Credit Risk Transfer for Freddie Mac, time has taught the GSE valuable lessons about engaging private investors in CRT transactions. As stated in the article, ”private investment segments are willing to take on credit risk at reasonable prices; it is important for Freddie Mac to retain a portion of the credit risk in its CRT programs in order to align interests with investors; offering multiple types of CRT products allows options to transfer risk across a range of economic environments; and communication is critical with investors in order to share with them Freddie Mac’s quality control and loan servicing processes as well as its practices and standards.”

Fannie Mae has followed Freddie’s suit, launching the Connecticut Avenue Securities series in September 2013 and the Credit Insurance Risk Transfer program the following year. Through the former program, the Fannie Mae has sold more than $12.4 billion in securities to private investors, covering $438 billion worth of mortgage loans.
 
 
FIRST SOLAR SECURITIZATION IN CHINA

The first solar securitization has been launched in China by Shenzen Energy, according to an article by PV Tech. The transaction was underwritten by BOC International, the investment banking arm of Bank of China, and raised CNY1 billion (US$152 million) according to the article. The bonds will carry interest rates between 3.6 – 4.5 percent and are backed by the “future revenues of Shenzen Energy’s solar projects.”

 
 
SUPREME COURT DENIES APPEAL TO ERASE STUDENT LOAN DEBT IN BANKRUPTCY

On January 11th, the U.S. Supreme Court denied an appeal seeking to make it easier to erase student loans in bankruptcy, according to a recent Wall Street Journal article. This case highlights a focal point for consumer advocates and lawmakers as more and more student loan borrowers fall behind on their payments. Student loan debt has more than doubled since 2007 to $1.3 trillion, and as many as one in four borrowers—excluding those still in school—are 90 days behind on payments, according to data from the Federal Reserve Bank of New York.

Student loan debt is prohibited from being canceled in bankruptcy unless it can be proven that an “undue hardship” is being faced. This vague phrase has led to uneven interpretations in the courts. 

The Justice Department, in a separate litigation last year, argued that the fiscal integrity of the federal student-loan program depended on ensuring that loans are repaid when feasible. More than 80% of all outstanding student debt in the U.S. is guaranteed by or directly owed to the Education Department, leaving taxpayers on the hook when borrowers fail to repay, according to the article.

Obama Administration officials have pointed to protections in the federal loan program—including the option to tie monthly payments to a borrower’s income, and to have balances forgiven after 20 years of payments—that reduce the need for bankruptcy.

 
 
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 Senior Policy Analyst

Jennifer Serpas Office Manager

Sarah Clarke Events Coordinator

1775 Pennsylvania Ave. NW
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Washington, DC 20006

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