January 8, 2014 Newsletter
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January 8, 2014
 

SFIG News

Issue Spotlight

Recent Developments

 
SFIG NEWS
SFIG AND SIFMA SCHEDULED TO MEET WITH REGULATORS TO DISCUSS PROPOSED LIQUIDITY COVERAGE RATIO
SFIG and SIFMA members and staff are scheduled to meet with regulators from the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (Fed), and Office of the Comptroller of the Currency (OCC) to discuss the proposed rule on the Liquidity Coverage Ratio (LCR) on Friday, January 10th.

On November 29, 2013, the OCC, Fed, and FDIC published in the Federal Register a notice of proposed rulemaking that would implement a quantitative liquidity requirement consistent with the LCR established by the Basel Committee on Banking Supervision. The proposal would apply to internationally active banking organizations—generally, those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance-sheet foreign exposure; to systemically important nonbank financial institutions; and to any consolidated bank or savings association subsidiary of one of these companies that, at the bank level, has total consolidated assets of $10 billion or more. The proposed LCR, which is designed to strengthen the liquidity risk management of banks and savings associations, would require covered companies to maintain a standard level of high-quality liquid assets. The comment period for the proposed rule ends January 31, 2014.

Please contact Sairah Burki, Director of ABS Policy at Sairah.Burki@sfindustry.org with any questions.

For the Federal Register notice click here.

 
SFIG JOINS WITH INDUSTRY GROUPS TO SEEK CLARIFICATION ON OWNERSHIP INTERESTS IN CONNECTION WITH CERTAIN CLO DEBT SECURITIES UNDER VOLCKER
On December 24, SFIG, the Loan Syndications Trading Association (LSTA), Securities Industry and Financial Markets Association (SIFMA), the American Bankers Association (ABA), and the Financial Services Roundtable (FSR) submitted a letter to the regulatory agencies seeking clarification on the definition of Volcker “ownership interests” in connection with certain CLO debt securities. On December 31, SFIG, the LSTA, SIFMA, and FSR submitted a supplemental letter to the regulators seeking grandfathering of certain CLO debt securities from Volcker investment restrictions.

On December 10, 2013, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission, and the Securities Exchange Commission approved final regulations implementing the “Volcker Rule”, which is formally known as the “Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds” Rule. The final regulations address proprietary trading and investments in hedge or private equity funds by banking institutions.

If you have any questions please contact Sairah Burki, Director of ABS Policy at Sairah.Burki@sfindustry.org.

Click here for the December 24 LSTA letter.

Click here for the December 31 LSTA letter.

Click here for a copy of the Volcker Rule.

Click here for the Federal Reserve Board staff memo.

Click here for the regulatory agencies’ fact sheet on the Volcker Rule.

 
SFIG ADDS MICHAEL FLOOD AS DIRECTOR OF ADVOCACY
Michael Flood will head SFIG’s advocacy efforts in Washington and elsewhere. Mr. Flood will report directly to Richard Johns, SFIG’s Executive Director, and will lead the group’s interaction with elected officials, regulators and other government representatives as it pertains to policies and positions derived by the membership. Mr. Flood has served in leadership roles at industry organizations overseeing advocacy and coalition building, and developing policy positions. Most notably this includes his work at Commercial Real Estate Finance Council where he oversaw and promoted the Council’s legislative and regulatory efforts for commercial real estate lending and structured finance with the Administration, Congress, regulatory agencies and market participants.

Mr. Flood has also worked for the White House Office of Management and Budget’s (OMB’s) Financial Rescue Unit, where he oversaw the Administration’s TARP investments; as a Director in both the Single and Multifamily Divisions of Fannie Mae; and as a legislative assistant for the House Energy and Commerce Committee where he worked on the Gramm-Leach-Bliley Act.

 
CHRISTOPHER COX, FORMER SECURITIES AND EXCHANGE COMMISSION CHAIR, WILL BE ABS VEGAS KEYNOTE SPEAKER
Former Securities and Exchange Commission Chair, Christopher Cox will join over 4,300 participants and 140 sponsors as the Keynote Speaker at ABS Vegas. Mr. Cox joins fellow keynote speaker Michael Stegman, Counselor to the Secretary of the Treasury for Housing Finance Policy at the United States Department of The Treasury.

Christopher Cox
Christopher Cox

The conference, held in Las Vegas from January 21-24, 2014, will include over 1,656 investors and issuers. Rooms at The Cosmopolitan are already sold out, with the overflow block of hotel rooms at the Aria also selling fast. Don’t miss the chance to be part of the Structured Finance Industry’s largest conference.

Click here for the conference agenda.

Click here to register for ABS Vegas 2014.

 
ISSUE SPOTLIGHT
Shedding Light on the Intersection Between CDO and Derivatives Documentation in the Solstice Case

Locke R. McMurray
Partner, Jones Day

Derivatives transactions are of course an important staple in the diet of CLOs and other structured finance vehicles. Structured finance vehicles routinely use derivatives as hedges for interest rate and foreign exchange risk, as synthetic investments and as credit enhancement. The documentation for structured finance transactions and for derivatives transactions are notoriously complex, and unexpected results can occur when they inter-operate or even “clash.”

Two little-noticed opinions, only one of which has been published, from the Solstice ABS CBO II case demonstrate some of the surprising twists and turns that can arise. In the first,[1] U.S. District Court Judge Batts of the Southern District of New York issued a decision on summary judgment that illustrates how indenture events of default and International Swaps and Derivatives Association (ISDA) additional termination events that are ostensibly designed to work in tandem can take surprisingly divergent paths. Second, U.S. Magistrate Judge Peck issued one of the very few - if not the only - published decisions of its kind in the United States assessing a contested termination value under an ISDA Master Agreement.[2] Although Solstice II is in essence a “battle of the experts,” the nature of the expert testimony required the court to delve into a great number of contentious interpretive issues concerning the indenture and the correct parameters for determining “loss” under an ISDA Master Agreement. Although the ISDA counterparty filed a Notice of Appeal for both decisions to the Second Circuit, the appeal has since been withdrawn.

           I. Factual Background.

Solstice ABS CBO II, Ltd. (Issuer) was formed as part of a collateralized debt obligation transaction to issue four classes of notes (Classes A-1, A-2, B and C) and two classes of equity backed by residential mortgage-backed securities. The Issuer also entered into a “Cashflow Swap Agreement” (Swap) with a financial institution (Provider) under which the Provider agreed to top up any shortfalls of interest available to be paid to the Class A-1, A-2 and B notes in return for an on-going fee and a promise to repay the Provider’s advances to the extent the Issuer later generated sufficient funds to do so. The Swap, which was made up of a standard 1992 ISDA Master Agreement and a Confirmation detailing the Swap’s financial terms, had certain intricate links to the indenture (Indenture) pursuant to which the notes were issued. Specifically, certain events of default under the Indenture (Indenture Events of Default) had two consequences for the Swap. First, an Indenture Event of Default constituted an “Additional Termination Event” under the Master Agreement that would enable the Provider to declare an early termination of the Swap and determine an amount (Termination Amount) equal, roughly speaking, to the value of the Swap to be paid either to or by the Provider. Second, an Indenture Event of Default constituted a “Cashflow Swap Cancellation Event” under the Confirmation, which would also result in an early termination of the Swap, but with financial consequences different from those that would apply to a mere Additional Termination Event. In the case of a Cashflow Swap Cancellation Event, the Provider would be relieved of its obligation to make future advances and the parties would simply settle up on the basis of an obligation on the part of the Issuer to repay past advances plus an accounting for fees owing to the Provider.

In late October 2009, the indenture trustee (Trustee) declared an Indenture Event of Default on the basis that the value of the Issuer’s assets as of a specific date (Measurement Date) had fallen below 101% of the aggregate face value of the Class A-1 and Class A-2 notes (Overcollateralization Test). The Provider responded on November 4, by declaring an Additional Termination Event and designating November 9 as the “Early Termination Date”. The Provider’s notice included a calculation of the Termination Amount in the amount of $2.2 million owing to the Provider on the basis that a Cashflow Swap Cancellation Event had also occurred and that this amount represented the calculation described in the preceding paragraph.

A number of other events also transpired during this time period. First, November 2 was another Measurement Date and the Issuer again failed the Overcollateralization Test. Second, and crucially, MBIA Insurance, Inc. (MBIA), as the “controlling class” under the Indenture, on November 6 (i.e., after the Provider’s declaration of an Additional Termination Event but before the Early Termination Date designated by the Provider) waived the Indenture Event of Default that the Trustee had declared in October and took the position that the Swap accordingly remained in full force and effect. Finally, November 9 was an interest payment date under the Indenture and the Issuer failed to make payment of all interest due to be paid the Class A-1, A-2 and B notes. This failure to pay interest, after a three business day cure period, constituted another Indenture Event of Default.

Because of the radically differing positions of the Provider and MBIA as to the status of the Swap and the amount of any payment that might be due to or from the Provider, the Trustee almost immediately commenced an interpleader on November 12.

           II. The Summary Judgment Decision.

U.S. District Judge Batts addressed the parties’ threshold contentions in cross-motions for summary judgment in Solstice I. Judge Batts first held that the Provider’s declaration of an Early Termination Date under the Swap was effective as of November 9, notwithstanding MBIA’s waiver of the Indenture Event of Default on November 6. However, because that waiver occurred before the Early Termination Date, it operated to nullify the Cashflow Swap Cancellation Event under the Swap and accordingly the special payment mechanic pertaining to a Cashflow Swap Cancellation Event.

The court reached this apparently incongruous result through a close reading of the Master Agreement and the Confirmation. Under the Master Agreement, if a party effectively delivers a termination notice at a time when an Event of Default or Termination Event is “then continuing,” the Early Termination Date will occur on the date so specified regardless of whether the Event of Default or Termination Date ceases to exist in the interim.

This is precisely the situation in Solstice I. The Provider responded to the Indenture Event of Default by giving notice, on November 4, of the designation of an Early Termination Date to occur November 9. The Additional Termination Event was thus “continuing” at the time the Provider gave its notice. Accordingly, the Early Termination Date occurred November 9 irrespective of MBIA’s intervening waiver.

The opposite result pertained with respect to the Cashflow Swap Cancellation Event under the Confirmation. Under the Confirmation, a Cashflow Swap Cancellation Event would be operative only for so long as the relevant Indenture Event of Default was “continuing.” MBIA’s November 6 waiver caused the Indenture Event of Default no longer to be “continuing” and, accordingly, the Cashflow Swap Cancellation Event had ceased to exist by November 9.

The second holding in Solstice I is slightly more subtle. The Master Agreement required that the Swap be valued “as of the relevant Early Termination Date,” which as previously noted occurred on November 9. The problem for the Provider was that MBIA’s intervening waiver of the Indenture Event of Default effectively nullified the Cashflow Swap Cancellation Event despite the fact that MBIA could do nothing to prevent the occurrence of the Early Termination Date. The Swap was accordingly to be valued as if no Cashflow Swap Cancellation Event had occurred. This set the stage for the valuation inquest before Magistrate Judge Peck.

            III. Battle of the Experts in Solstice II: The Contentions.

Magistrate Judge Peck ultimately found that the Provider owed a sizeable payment to the Issuer on the basis of his review of copious expert testimony. There are several noteworthy features to the various expert opinions in Solstice II. First, the Provider’s expert testified as to three different valuation “models” whose applicability depended on various legal assumptions. This enabled (or required) the court to assess these legal assumptions in the course of accepting or rejecting the various outcomes. Second, both experts utilized a “discounted cash flow” model that attempted to predict exactly what cash flows would have occurred when, and discounted them to present value.

The Provider’s expert, Michael DiYanni (DiYanni) applied certain legal assumptions and analytics to create three different valuation “models.” “Model A” assumed that Solstice’s payment obligations under the Swap are to be valued as if they had been met when due, regardless of whether there would have been funds availability under the “priority of payments” provisions of the Indenture. “Model B” assumed that a Cashflow Swap Cancellation Event was in effect on the Early Termination Date notwithstanding MBIA’s waiver of the original Indenture Event of Default. “Model C” assumed that the “priority of payments” provisions of the Indenture would be operative to defer or cancel Solstice’s payment obligations depending upon whether and when funds sufficient to pay senior claimants are projected to exist.

“Model A’ and “Model B” resulted in amounts payable to the Provider roughly in line with the Provider’s original calculation, but the court rejected them as being not legally warranted. Model C produced amounts payable by the Provider and, because MBIA’s expert utilized much the same methodology, became one of the contenders in the “battle of the experts”.

MBIA’s expert, Dr. Peter Niculescu (Niculescu) provided only opinions that, like Model C, assumed the “priority of payments” of the Indenture would be operative. All of Niculescu’s opinions resulted in substantial amounts payable by the Provider to Solstice.

            IV. Model A: Availability of Funds Not a “Condition Precedent”.

Model A assumed that Solstice would perform its obligations when they came due, irrespective as to whether it would have funds available to do so under the priority of payments provisions of the Indenture. DiYanni calculated a value in favor of the Provider equal to $ 2.54 million and testified that Model A was “an appropriate model” and that in his experience, “the calculation of Termination Payments for derivatives transactions is based upon present valuing…a projection of what each party ‘should’ pay under the agreement, not what each party ‘would’ actually be able to pay.” The Provider argued, in legal terms, that the availability of funds under the priority of payments provision was a “condition precedent” to Solstice’s obligation to pay. The Provider further argued that, because the ISDA valuation process[3] assumes the satisfaction of all “conditions precedent” to future payment obligations, it follows that the availability of sufficient funds to pay the Provider, as a “condition precedent” to payment, must be assumed. The court dismissed the argument because the parties had not expressly designated the availability of funds as a “condition precedent” and because the law disfavors conditions precedent and will only treat them as such when they are clearly and unambiguously so designated.

            V. Model B: No Superceding Indenture Event of Default.

Model B assumed that, notwithstanding MBIA’s waiver of the Indenture Event of Default relating to the Over-Collateralization Test on the October Measurement Date, a Cashflow Swap Cancellation Event was nonetheless in effect on November 9, the Early Termination Date, for two reasons. First, Solstice had breached the Over-Collateralization Test “again” on the November 2 Measurement Date whereas MBIA had only waived the October Measurement Date breach. Second, Solstice’s failure to pay all interest to senior noteholders on November 9 represented another Indenture Event of Default. These two events, the argument ran, gave rise to a “new” Cashflow Swap Cancellation Event on or before the November 9 Early Termination Date.

Magistrate Judge Peck rejected both contentions. First, he noted that the Indenture makes frequent reference to the possibility that Indenture Events of Default can “have occurred and be continuing” and second that an Indenture Event of Default will cease to be “continuing” if it is “cured or waived.” The court reasoned, accordingly, that because the October Indenture Event of Default “continued” through and beyond November 2, the November 2 breach of the Over-Collateralization Test was not a separate Indenture Event of Default and that there was no need for any additional waivers beyond what MBIA had provided relative to the October Over-Collateralization Test breach on November 6.

With respect to the putative interest payment Indenture Event of Default, the court noted that there was a three-day cure period which had only begun to elapse on November 9 and accordingly that there was neither an Indenture Event of Default nor a Cashflow Swap Cancellation Event in existence by virtue of the failure to pay interest on November 9. Model B was thus excluded from consideration as resting on faulty assumptions.

            VI. Model C: Estimated Cash Flow and Outcome.

As already noted, Model C and Niculescu utilized broadly the same methodology – a discounted cash flow analysis applied to projected cashflows and taking the availability of funds under the priority of payments provisions into account – but reached very different results on the basis of different financial assumptions. All results, however, resulted in sizeable payments owing from the Provider to Solstice. The court ultimately sided with DiYanni’s valuations, largely for the simple reason that the Provider was the party who was not the Affected Party and therefore, under the terms of the ISDA Master Agreement, the party that was entitled to determine the termination amount.

            VII. Conclusion.

The lessons of Solstice I and II are legion. Principal among them are how the delicate balance in the documents between the Additional Termination Event and Cashflow Swap Cancellation Event – both of which were triggered by the same Indenture Events of Default and were thus presumably designed to work in tandem – was disrupted by an intervening waiver of the relevant Indenture Event of Default. This disruption caused a $2.2 million payment owing to the Provider to be altered in favor of a sizeable payment owing to the Issuer.

Another lesson is that Solstice II’s rejection of the Provider’s “Model A” is arguably in tension with the “value clean” line of authority on valuations under 1992 ISDA Master Agreements in the courts of England and Wales.[4] In other words, if Magistrate Judge Peck had been more willing to view the availability of funds provisions under the Indenture as a “condition precedent,” he might have been required to value the Swap on the somewhat implausible basis that the Issuer would always have had funds available to it to perform its obligations under the Swap.

Finally, Solstice I in its careful reading of the Master Agreement and Solstice II in its searching analysis of the legal assumptions underlying the Providers three valuation “models” augment the comparatively small group of decisions of their kind in United States courts. The United States courts have heretofore lagged their counterparts in London on cases concerning the interpretation of ISDA documentation. The fall-out from the credit crisis may help to close that gap.

[1] Bank of N.Y. Mellon Trust Co., N.A. v. Solstice ABS CBO II, Ltd., No. 09 Civ. 9415 (DAB), slip op. (S.D.N.Y. March 28, 2012) (“Solstice I”). A copy of this decision is on file with the author.

[2] Bank of N.Y. Mellon Trust Co., N.A. v. Solstice ABS CBO II, Ltd., 910 F. Supp. 2d 629 (S.D.N.Y. 2012) (“Solstiice II”). The parties had consented to the entry of final judgment by the magistrate pursuant to 28 U.S.C. § 636(c)(1).

[3] Strictly speaking, the Master Agreement specified that the “Market Quotation” methodology be utilized to determine the Termination Amount but the Provider “purportedly” utilized the Loss methodology. Although a detailed description of these methodologies might in other circumstances be warranted, for present purposes it is sufficient to note that Judge Batts had essentially held in Solstice I that satisfaction of all future conditions precedent must be assumed under both methodologies. Solstice I, supra note 1, at *17. This is consistent with the definition of “Market Quotation,” see 1992 ISDA Master Agreement (Multicurrency - Cross Border) § 14 (definition of “Market Quotation”) and, relative to “Loss,” with an authoritative line of cases under the laws of England and Wales. See Lomas v. JFB Firth Rixson Inc., [2102] EWCA Civ 419 (Ct. App. April 3, 2012), at ¶¶ 133-34 (quoting Pioneer Freight Futures Co. Ltd. (in liquidation) v. TMT Asia Ltd., [2011] EWHC 778 Comm, at ¶ 116).

[4] See, e.g., Lomas v. Rixson Inc., supra, at ¶129: “This means that the loss of bargain must be valued on an assumption that, but for termination, the transaction would have proceeded to a conclusion, and that all conditions to its full performance by both sides would have been satisfied, however improbable that assumption may be in the real world.” Application of the “value clean” principle is accordingly a rather abstract exercise and has been determined, for example, to preclude consideration of the Non-defaulting Party’s creditworthiness in determining the valuation of transactions. See, e.g., Austl. and N.Z. Banking Grp. v. Societe Generale [2000] EWCA Civ 44, ¶¶6; 30-31 (Ct. App. Feb. 17, 2000); Peregrine Fixed Income Ltd. v. Robinson Dep’t Store Pub. Co. Ltd. [2000] EWHC Commercial 99 (High Court (Commercial) May 18, 2000).

 
RECENT DEVELOPMENTS
SENATE CONFIRMS JANET YELLEN AS FEDERAL RESERVE CHAIR
By a vote of 56-26 the Senate confirmed Janet Yellen to serve as the next Chair of the Federal Reserve Board (Fed). Yellen will assume the role after current Chair Ben Bernanke steps down at the end of January. Currently serving as Fed Vice-Chair, Yellen will be the first woman to head the U.S. Central Bank. Her policy positions are viewed as closely aligned with those of Bernanke and she has expressed concern regarding continued high rates of unemployment. She has, in previous statements, indicated she will continue the Fed’s policy of quantitative easing.
 
 
REGULATORS REVIEWING VOLCKER EXEMPTION FOR TRUST PREFERRED COLLATERALIZED DEBT OBLIGATIONS
The Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and the Securities and Exchange Commission are reviewing whether exempting trust preferred collateralized debt obligations from the investment prohibitions of section 619 of Dodd-Frank would be “appropriate and consistent” with the act. Regulators are set to address the issue no later than January 15.

In light of this review, the American Bankers Association (ABA) is dropping its request for a temporary restraining order against implementation of the Volcker Rule restrictions on collateralized debt obligations (CDOs) backed by trust preferred securities.

Click here for the Statement regarding treatment of Certain Collateralized Debt Obligations Backed by Trust Preferred Securities under the Rule implementing Section 619 of the Dodd-Frank Act.

 
NATIONAL RETAIL FEDERATION FILES APPEAL OF CREDIT CARD SWIPE FEE SETTLEMENT
The National Retailed Federation (NRF) filed notice with the second Circuit United States Court of Appeals appealing the order granting final approval of the settlement in a class action over credit card swipe fees. The $5.7 billion settlement was approved by a Federal Judge in December. NRF General Counsel Mallory Duncan issued a statement following the Notice of Appeal indicating “There has been no agreement to this settlement by the retail industry. Instead, there’s a settlement with nine individual retailers whose views are not representative of the collective industry.” The NRF said the settlement, between retailers and Visa Inc. and Master Card Inc. was rejected by nearly 8,000 retailers and merchants.

Click here for the Notice of Appeal.

 
SECURITIES AND EXCHANGE COMMISION IMPLEMENTS AMENDMENTS REMOVING RATINGS AGENCY REFERENCES
The U.S. Securities and Exchange Commission (SEC) announced several reference eliminations from rules and forms pertaining to credit ratings. As required by the Dodd-Frank and Consumer Protection Act, the SEC removed references to credit ratings in specified rules and forms, including: Rule 5b-3 under the Investment Company Act, Forms N-1A, N-2, and N-3, Rule 15c3-1 (and certain appendices) under the Securities Exchange Act of 1934, Rule 15c3-3 and Rule 10b-10 under the Securities Exchange Act of 1934.

Click here for the full rule removing certain references to credit ratings under the Investment Company Act.

Click here for the full rule removing certain references to credit ratings under the Securities Exchange Act of 1934.

 
SECURITIES AND EXCHANGE COMMISSION RELEASES ANNUAL REPORT ON NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS
Aiming to improve compliance, transparency, and competitiveness among the Nationally Recognized Statistical Rating Organizations (NSROs) the U.S. Securities and Exchange Commission (SEC) released its findings in December 2013. The report highlighted areas of improvement for NRSROs as well as recommendations by the SEC. Areas where the SEC found room for improvement included: comprehensive procedures for ratings placed under review as well as oversight of the procedure for creating new rating methodologies and criteria. The report also identified the number of NRSRO applicants (now at 10), actions taken on the applications, and the SEC’s assessments regarding competition, transparency, and conflicts of interest among NRSROs (noteworthy increase of market share in ratings for certain types of asset-backed securities at smaller NRSROs and transparency has increased due to the emergence of unsolicited rating commentary issued by other credit rating agencies).

Click here for 2013 SEC Report on Findings and Examinations of NSROs.

Click here for 2013 SEC Report to Congress on NSROs.

 
PROPOSED LIMIT TO AUTHORITY OF BOARD TO EXTEND EMERGENCY LOANS
The U.S. Federal Reserve Board of Governors proposed a limit to the board’s scope of authority to offer emergency-lending programs to certain larger financial institutions on the verge of folding. The provision mandates that emergency-lending programs only be used to boost liquidity. The U.S Treasury secretary must also sign off before these loans are offered. Public comment regarding the Reserve Board of Governors plan will be open until March 7th.

Click here for the full text of the proposal regarding emergency lending.

 
CENTRAL BANKERS HOLD INTERNATIONAL MEETING TO DISCUSS DEFINING LEVERAGE RATIO
A meeting among regulators to discuss and agree upon a definition of the debt-limit rule, also known as the leverage ratio, will occur January 12 in Basel, Switzerland. Earlier this year, the Basel Committee on Banking Supervision set forth a draft rule requiring banks to hold a capital equivalent of at least 3 percent of their assets regardless of risk-weighting.

Large banking corporations have called for a rewrite of the draft rule that the Basel Committee set forth earlier this year, declaring that it unfavorably affects job creation and economic growth, makes it more expensive for governments to issue debt, and incentivizes banks to invest in riskier assets. Discussions in the Basel Committee have thus far concentrated on the definition of assets rather than on what level the draft leverage rule should be set.

Click here for the Revised Basel III leverage ratio framework and disclosure requirements—consultative document.

 
MEL WATT SWORN IN AS DIRECTOR OF FEDERAL HOUSING FINANCE AGENCY, SIGNALS CONCERNS FOR CREDIT AVAILABILITY
On January 6, 2014, Rep. Met Watt (D-NC) was sworn in as Director of the Federal Housing Finance Agency (FHFA). In December, Watt announced that upon assuming the Director’s role he would immediately delay a series of scheduled loan-fee hikes, citing the need for “opportunity to evaluate fully the rationale for the plan.” Signs indicate that cost and availability of credit will be a primary concern but it remains to be seen what other developments will arise during Director Watt’s tenure with the agency.

Click here for the FHFA Press Release Announcing Rep. Watt’s swearing in.

 
FREDDIE MAC SHOWS STABILITY IN YEAR END FIXED RATE MORTGAGE RATES, EDGE UP TO BEGIN 2014
The release of Freddie Mac’s (Freddie) Primary Mortgage Market Survey (PMMS) showed little change in year-end fixed rate mortgage figures. Freddie’s vice president and chief economist, Frank Nothaft, issued a statement saying “Mortgage rates were little changed this week following mixed economic reports. Real GDP was revised upwards to 4.1 percent growth in the third quarter of this year. However, existing-home sales dropped 4.3 percent to a seasonally adjusted annual rate of 4,900,000 in November. Also, new home sales fell 2.1 percent to a seasonally adjusted annual rate of 464,000."

The PMMS showed mortgage rates rising slightly as 2014 begins.

Click here for the PMMS.

 
CONSUMER FINANCIAL PROTECTION BUREAU CRACKSDOWN ON POSSIBLE UNFAIR LENDING
The Consumer Financial Protection Bureau (CFPB) is investigating possible unfair, deceptive, or abusive acts and practices among bank and nonbank finance companies. The areas of deceptive marketing and the impact on “protected classes” through the Equal Credit Opportunity Act are among those being addressed. The CFPB began their crackdown by looking into accounts of marketing and business practices that involved the use of falsified loan documents as well as an identity theft incident in which two buyers’ personal information was used to purchase additional properties unknowingly in their names. Future CFPB investigations will concentrate on more recent issues occurring within the past ten years.
 
 
FHFA DIRECTS FANNIE MAE AND FREDDIE MAC TO DELAY GUARANTEE FEE CHANGES
On January 8, 2014, Director Mel Watt announced that the Federal Housing Finance Agency (FHFA) would delay increasing base guarantee fees (g-fee) until he has had the opportunity to review the matter further. The newly sworn-in official cautioned the g-fee price increase could have a significant impact on the housing finance market and therefore FHFA will not implement the planned changes until 120 days after he has completed an evaluation. In early December, FHFA had announced plans, effective in March and April 2014, to increase the base g-fee for all mortgages by 10 basis points, update the up-front g-fee grid, and eliminate the up-front 25 basis point adverse market fee that has been assessed on all mortgages purchased by Fannie Mae and Freddie Mac since 2008.

Click here for the FHFA release.

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 visit our website for more information, including how to join.

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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 (www.sfindustry.org) to learn about membership opportunities.

SFINDUSTRY.ORG

Contact Information

Richard Johns for all matters

Kristi Leo for Investor related matters

Sairah Burki for ABS Policy related matters

Sonny Abbasi for MBS Policy related matters

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