July 31, 2013 Newsletter
Problem viewing this email? Click here for our online version.


Issue Spotlight

Recent Developments




SFIG is pleased to announce that this week's edition of the SFIG Newsletter features our new logo at the top left-hand corner. As our new organization grows and expands, we wanted to create a unique logo that captures the essence of SFIG, our core principles and our mission. Our new symbol resembles a bridge, as SFIG gathers and connects all securitization market players with our common goals. Additionally, the upwards-facing trajectory of our logo mirrors where we currently see ourselves in the market. For the securitization industry, the future promises to be a busy and challenging time full of new developments and changing priorities. SFIG aims to charter a clear, transparent course for our members and help all members achieve their most successful years-to-date. We would like to thank the Executive Committee for their valuable input, as well as the generously donated time from Opus Capital Markets to help turn our vision into our innovative logo.



Members of SFIG’s Accounting Committee met with representatives of the Financial Accounting Standards Board (FASB) and of the International Accounting Standards Board (IASB) on July 30, 2013, to discuss the classification and measurement rules proposed in FASB’s February 14, 2013 Exposure Draft entitled “Recognition and Measurement of Financial Assets and Financial Liabilities” (Exposure Draft) as they relate to beneficial interests in securitized assets.

As proposed, many investments, including very senior tranches of residential mortgage-backed securities and asset-backed securities, would likely be required to be classified and measured at ”fair value,” with changes in fair value being recorded in net income. The group discussed how the proposal is not aligned with the investor due diligence process and discussed the investment process for several asset classes. The SFIG representatives raised concerns as to the availability of data and the extensive effort needed to perform the proposed analysis. The representatives of the FASB and the IASB in attendance were receptive to the Accounting Committee members when presented with an alternative path forward that would be principles based, aligned with the principles to be applied to other financial instruments and less complex and more operational while achieving the Boards’ objectives. The Accounting Committee looks forward to the opportunity to continue discussions with the Boards to further build out an approach.

If you are interested in participating in SFIG’s Accounting Committee, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the Exposure Draft.




In the last few years, the London interbank offer rate (LIBOR) has been the subject of considerable media attention: first, in connection with multiple allegations of rate-rigging that implicated dozens of banks and resulted in regulatory investigations around the globe, and now in connection with various reforms to the regulation of LIBOR and proposals for an alternative benchmark. UK regulators want to preserve LIBOR as an international benchmark whereas Gary Gensler, chairman of the U.S. Commodities Futures Trading Commission (CFTC), has publicly implied that LIBOR is an anachronism, likening the benchmark to “bell-bottoms” and calling for the replacement of LIBOR with alternative benchmarks grounded in observable transactions.

LIBOR is the most frequently utilized benchmark for interest rates globally, referenced in transactions with a notional outstanding value of at least $300 trillion according to the Wheatley Review of LIBOR: Final Report dated September 2012 (Wheatley Review). (The Wheatley Review is an independent review of LIBOR led by Martin Wheatley, CEO of the new Financial Conduct Authority (FCA) and conducted at the request of the UK Chancellor of the Exchequer). LIBOR-linked transactions include complex derivatives, futures contracts, interest rate swaps, corporate loan agreements, mortgages, student loans, credit cards, and consumer loans

Alternatives to LIBOR

Market participants and regulators throughout the world are divided as to the future use of LIBOR as a significant benchmark. Several regulators have favored the replacement of LIBOR with alternatives. U.K. regulators as described in the Wheatley Review concluded in favor of comprehensively reforming LIBOR rather than replacing the benchmark, reasoning that a transition to a new benchmark would pose an unacceptably high risk of significant financial instability, and risk large-scale litigation between parties holding contracts that reference LIBOR. Despite of this position, the Wheatley Review discussed various benchmarks as alternatives to LIBOR.

The Wheatley Review identified specific criteria to determine the suitability of a particular benchmark as a direct alternative to LIBOR. These criteria are as follows:

(i) the benchmark should have a maturity curve for the full spectrum of maturities; (ii) the underlying market should be resilient, as far as possible, through periods of stress and illiquidity; (iii) a liquid underlying market with transaction volumes would help corroborate the rate; (iv) an interest rate benchmark should be transparent, simple and standardized with respect to the instruments and transactions that are used to determine the rate, in particular, across multiple currencies. This can facilitate a deeper and more liquid market from which the rate can be derived; and (iv) ideally a historical time series would be available for alternative benchmarks, allowing past behavior to be used in pricing and risk models.

The Wheatley Review discussed a number of specific alternative benchmarks including overnight index rates, overnight index swap rates, repo rates, short-term government debt yields, certificates of deposit rates, commercial paper rates, central bank policy rates and synthetic rates.

Overnight Index Rates

Both the Wheatley Report and The Bank for International Settlements Report “Towards Better Reference Rate Practices: A Certain Bank Perspective” dated March 2013 (BIS Report) suggest overnight index rates (OIR), such as SONIA (the Sterling Overnight Index Average), EONIA (the Euro Overnight Index Average) and the Federal Funds Effective Rate, as potential alternative benchmarks. These rates measure weighted average overnight unsecured lending rates. SONIA is the weighted average of all unsecured overnight sterling money market trades brokered in London by a Wholesale Markets Brokers’ Association (WMBA) member, as reported to the WMBA. EONIA is similar to SONIA, but for money market trades denominated in Euros. The daily Federal Funds Effective Rate is a volume-weighted average of rates on trades arranged by major brokers of excess Federal Reserve deposits.

The BIS Report suggests that OIR are a possible alternative to LIBOR for the following reasons: Generally, the markets underlying OIR are well developed, fairly active and highly liquid. Because the lending occurs overnight, these markets tend to be resilient even in times of market stress. However, as noted by the Wheatley Review, because they are overnight rates, no maturity curves are associated with OIR and little credit or liquidity risk is priced into the rates. For these reasons, the Wheatley Review noted that they are not a direct substitute for LIBOR.

Overnight Index Swap Rates

Overnight index swap (OIS) rates are another potential LIBOR alternative. OIS are interest rate swaps in which the rate for the floating leg is based on a compounded OIR and the rate for the fixed leg is the OIS rate. As noted in the Wheatley Review, OIS rates only reflect pure interest rate exposure. OIS do not contain much credit risk because no principal is exchanged between the parties and many of these swaps are collateralized. Another important benefit of OIS in conjunction with overnight index rates is that such combination allows construction of a maturity curve. However, the reliability of these rates is only as robust as the underlying overnight indices. The Wheatley Review noted: “[o]ne disadvantage of OIS is that there is a lack of liquidity, particularly in longer tenors. Another barrier to adoption of OIS as a reference rate is that a standard, widely accepted OIS ‘fix’ may not exist. Currently cash brokers provide indicative OIS curves as a reference, however in general the brokers are not committed to trade at these quotes.”

Secured Lending (Repo Rates)

Given the recent shift to collateralized funding in financial markets, repurchase agreement rates, or repo rates, may represent a logical alternative to LIBOR. The repo rate for a repurchase agreement represents the extent to which the repurchase price of the underlying reference security is greater than the original sales price. Indices of repo rates have been launched in the U.S. (DTCC GCF Repo index), in the U.K. (Repurchase Overnight Index Average (RONIA)), and in Europe (Eurepo).

Repo rates have several characteristics that raise concerns as to their viability as a LIBOR alternative. An initial concern with repo rates is that repo activity is primarily concentrated in short tenors, with almost no activity in tenors beyond 3 months. A second concern is that repo rates do not fully reflect bank credit risk, since the repos are collateralized. A third concern is (as set forth by the Wheatley Review) that “term repo rates are particularly sensitive to credit and liquidity risks of the underlying collateral, so they could be influenced by factors such as collateral supply and liquidity and the yields of the underlying assets.” The viability of repo markets in times of market stress is also a concern.

The Wall Street Journal reported that banks are trying out a rate linked to repos and in particular are testing the DTCC GCF Repo Index as the benchmark rate for interest-rate swaps. The DTCC GCF Repo Index is actually composed of the aggregate of three separate indices based on the par weighted average daily interest rate paid for general collateral repos in each of: (i) U.S. Treasury securities; (ii) federal agency securities; and (iii) mortgage-backed securities issued by Fannie Mae and Freddie Mac. The repo activity captured in the DTCC GCF Repo Index is overnight dealer-to-dealer trades; inter-dealer broker trades are excluded. To address potential manipulation of the index, DTCC has installed statistical screens that flag trades that fall outside a pre-determined variance band from the prior day’s published index rate.

Short-Term Government Debt

The yields on high-quality short-term government debt securities are another potential alternative benchmark. These securities have well-established markets with a long data series, yield curves for a variety of maturities, deep and liquid trading markets and are generally resilient in times of market stress. One potential issue with using government debt as a benchmark instead of LIBOR is that during times of market stress, demand for short-term government debt of high-quality sovereign issuers can increase dramatically in a “flight to quality,” resulting in very low yields for these securities. As a result, during such periods, government debt behaves in a manner that is the opposite of actual bank-funding costs. Furthermore, as noted by the Wheatley Review, short-term government debt yields may be negative and it remains unclear whether some markets (such as floating rate notes) are prepared for negative coupons. The negative correlation feature coupled with possible negative yields makes the use of government debt undesirable as the general benchmark to fully replace LIBOR.

Certificates of Deposit and Commercial Paper Rates

An alternative benchmark could be constructed from the interest rates paid on certificates of deposit (CDs) or commercial paper (CP) as issued in the primary market and traded in secondary markets. However, the Wheatley Review noted that they are unsuitable replacements for LIBOR because “they suffer from similar issues to unsecured inter-bank lending, in that the market has come under severe stress in the aftermath of the financial crisis, being adversely affected by heightened perceptions of counterparty credit risk; and liquidity beyond short-term is low in both the primary and secondary markets.”

Central Bank Policy Rates

Central banks set target interest rates as key levers of monetary policy. Although resilient in times of market stress, these rates are unlikely candidates to replace LIBOR because: (i) they are not interest rates at which banks actually trade; (ii) they are subject to manipulation to achieve a central bank’s monetary policy (iii) no maturity curve is associated with these rates; and (iv) few, if any, relevant derivatives are based on them.

Synthetic Rates

The Wheatley Review noted that for a benchmark that more closely reflects individual banks’ cost of funding, one possible alternative rate to LIBOR is a synthetic rate that combines a risk-free rate (e.g. OIS) and a bank specific measure of credit risk (perhaps based on bond yields, CDS premia, fixed premia or similar). The Wheatley Review noted that the advantages of a synthetic rate include the ability to design the synthetic rate with specific components so that the specific rate reflects the characteristics desired in the benchmark. The disadvantage of any synthetic rate is that it is only as strong as its components. For example, some components may incorporate elements unrelated to the desired benchmark characteristics in addition to those that are desirable. The Wheatley Review concluded that in order for a synthetic rate to be a viable LIBOR alternative “it would be necessary to ensure that all of the respective components are representative and robust – in particular, that the markets underlying them are not illiquid, subject to attempted manipulation and that benchmarks from these markets are fit for purpose.”

Bloomberg - BLIBOR

In August 2012, Bloomberg LP (Bloomberg) proposed a synthetic rate alternative to LIBOR named the Bloomberg Interbank Offered Rate (BLIBOR). BLIBOR would use market based quotes for actual transactions (such as credit default swaps, corporate bonds and commercial paper) in addition to existing methods of determining LIBOR to create a more accurate and independent measure of interbank lending rates. Bloomberg’s proposal is still in the early stages and details as to precisely how the credit risk component of BLIBOR would be calculated have not been developed yet.

Barriers to Implementing LIBOR Alternatives

As noted in the BIS Report and the Wheatley Report, constraints toward moving away from LIBOR include: (i) limited liquidity in other benchmark rates; (ii) large operational costs for moving to alternative benchmark rates; (iii) the long history of using LIBOR and the comfort this provided (i.e. inertia); (iv) possible legal risks that could emerge in switching to alternative benchmark rates; and (v) accounting rules in the United States.

The FASB accounting standards for hedge accounting currently give preferential treatment to LIBOR and interest rates on direct Treasury obligations. LIBOR alternatives like the Fed Funds Rate cannot be used without satisfying certain effectiveness testing standards. LIBOR was included as a practical accommodation to simplify financial reporting. The FASB decision was based on LIBOR’s prevalence as benchmark rate in interest rate hedging instruments, its historical position in the financial markets and its role as a liquid, stable and reliable indicator of interest rates.

Overhaul of LIBOR Regulation

The governance of LIBOR has been completely overhauled after the U.K. Government accepted and adopted in full the recommendations of the Wheatley Review.

Under the new regulatory regime for LIBOR, the UK government will regulate LIBOR, but a private administrator will retain primary responsibility for the LIBOR submission and publication process. LIBOR-related activities, specifically providing information in relation to a regulated benchmark and administering a regulated benchmark, have become “regulated activities” under Financial Services and Markets Act of 2000 (FSMA 2000), for which the UK Financial Conduct Authority (FCA) will be responsible.

The Financial Services Act 2012 (FSA 2012) creates the new offence of “misleading statements or misleading impressions in relation to benchmarks.” The offence criminalizes making misleading statements or misleading impressions in connection with the setting of a relevant benchmark. It criminalizes activity by: (a) any person who knowingly or recklessly makes a false or misleading statement to another with the intention that the statement is used for setting a relevant benchmark; and (b) any person who, by a course of conduct, intends to, and knowingly or recklessly does, create a false or misleading impression as to the price of any investment or transaction with an interest rate that may affect the setting of a relevant benchmark. A “relevant benchmark” is one specified by the UK Treasury and which so far consists only of LIBOR.

The new offence is not extraterritorial in scope. For misleading statements, it requires that they be either made in the UK, or to a person in the UK. With respect to misleading impressions, they must be created in the UK; and the course of conduct must take place in the UK.

A closely related issue with the LIBOR reforms is the decision to continue to rely on a rate-setting mechanism of uncommitted quote submissions. Previously, banks had no obligation to tie their LIBOR submissions to actual transaction data. Under the new regime, submitting banks are supposed to make “explicit and clear use of transaction data to corroborate their submissions.” Two alternative rate-setting mechanisms were not adopted: (1) reliance solely on actual transaction data and (2) a committed quote system.

To assist the FCA with LIBOR regulation and as part of the LIBOR reform, a number of other key regulatory provisions were also introduced into the FCA’s Market Conduct sourcebook.

The most notable of these regulatory provisions are the following:

  • Any entity engaging in the activities of (i) providing information in relation to a specified benchmark and (ii) administering a specified benchmark will require the authorization of, and be subject to, the oversight of the FCA. In 2014, NYSE Euronext will take over responsibility for administering LIBOR from the BBA and will be required to have a much more hands-on role in monitoring suspicious activity and corroborating information provided by banks making LIBOR submissions that was previously demonstrated by the BBA.
  • The administrator of LIBOR will be required to maintain effective systems to carry out the regulated activity. In carrying out tasks such as monitoring and validating submissions to benchmarks, the administrator is required to create oversight committees. The oversight committees would be composed of benchmark users, market infrastructure providers, benchmark submitters and at least two independent members. The oversight committees will be responsible for “considering matters of definition and scope” of the benchmark, scrutinizing benchmark submissions, and notifying the FCA of those submitters who fail to meet the standards for submissions on a regular basis.
  • Submitting banks are required to have systems that identify and manage conflicts of interest that may arise from the process of making benchmark submissions. The FCA recommends that such a system include the implementation and maintenance of a clear “conflicts of interest policy” which identifies the circumstances that constitute a conflict of interest arising from benchmark submissions, and the establishment of effective controls to manage any conflicts.
  • Submitting banks are required to appoint an FCA-approved individual responsible for a company’s internal benchmark submission process and to have oversight of the bank’s compliance with the new regulations.

Submitting activity may happen outside the UK, through a LIBOR panel bank that does not have a UK establishment and thus the new regulations are extraterritorial in scope as the FCA requires an individual to discharge the new controlled benchmark submission function “regardless of where the submitting activity takes place.”

Since July of 2012, individual LIBOR submissions from panel banks are to be published after a period of three months and not on the submission date, as was prior practice. As noted in the Wheatley Review, this is intended to address the stigma of submitting higher rates while also making it more difficult for banks to manipulate LIBOR through collusion. The daily publication of the final LIBOR rates will not be affected by the three month embargo.

More Information about LIBOR

For more information about LIBOR, click here.

For the Wheatley Report click here. For the BIS Report click here.




Last week Freddie Mac completed the successful offering of a $500 million single-family credit-risk sharing transaction in which private capital will take the predominant credit loss.

Freddie Mac said this offering – an unsecured debt issuance, called Structured Agency Credit Risk (STACR) – provides it with an additional means of reducing credit exposure and taxpayer risk by bringing more private capital to the mortgage market.

The amount of periodic principal and ultimate principal to be paid on the STACR is determined by the performance of a large and diversified reference pool representing a $22.5 billion residential mortgage loan balance.

Due to investor demand, the size of the offering was increased from $400 million to $500 million, and about 50 broadly-diversified investors participated in the offering, including mutual funds, hedge funds, REITs, pension funds, banks, insurance companies and credit unions.

Freddie Mac is the first Government-sponsored entity (GSE) to develop and market this type of risk-transfer transaction while in conservatorship and hopes to issue another credit risk transfer transaction this year.

STACR supports the Federal Housing Finance Agency’s goals for the GSEs to demonstrate the viability of multiple types of risk transfer transactions involving single family mortgages.

Click here for the STACR offering circular. Click here for the Freddie Mac press release relating to the STACR transaction. Click here for the statement of Federal Housing Finance Agency Acting Director Edward DeMarco on the STACR transaction.



On July 29, 2013, the U.S. Court of Appeals for the 11th Circuit, in the class-action lawsuit Max Leroy Reed v. Chase Home Finance, LLC, held that Chase Home Finance, LLC (Chase), as servicer, was not required under the Truth In Lending Act (TILA) to notify borrowers when their mortgages were assigned to the servicer.

The court held that Chase’s activities fell within the “safe harbor” exception of 15 U.S.C. §1641(f), which provides that a servicer is exempt from the requirement of §1641(g) that notice of a “new creditor” be given to a borrower following the assignment of a mortgage loan. The “safe harbor” provides that the servicer is not treated as the owner of the mortgage loan on the basis of an assignment “to the servicer solely for the administrative convenience of the servicer in servicing the obligation.”

The court rejected the argument made by Mr. Reed that Chase was not exempt from the TILA notification requirement because the assignment to Chase made it “the new owner of the debt.”

Click here for the Court’s ruling. Click here for the related provisions of TILA.



According to an article appearing in Risk Magazine on July 26, 2013, the International Swaps and Derivatives Association (ISDA) has established a committee (Committee) to design a standard industry margin model (SIMM) for non-centrally cleared swaps.

Derivatives dealers originally opposed any plan for the managing of non-centrally cleared, over-the-counter trades, according to the Risk article. However, according to the same article, the industry would rather have a standard model such as SIMM as opposed to “a punishing margin schedule drawn up by the regulators themselves… or models of their own [developed by the dealers and submitted] for regulatory approval. The fear is that this would produce an army of different approaches, each of which might need to be signed off by multiple supervisors, forcing many participants to use the standardized schedule while they wait in the queue, and producing a host of margin disputes thereafter.”

The securitization industry is forming a consensus interpretation that swaps with securitization trusts (most commonly, interest rate swaps) will not be subject to a clearing requirement through a central counterparty (CCP). As a result, the expectation is that most (if not all) swaps with securitization vehicles would be non-centrally cleared.

SFIG believes that the posting of margin with regard to swaps with securitization entities – whether or not those swaps are required to be cleared through a CPP – is unnecessary, and such a requirement may have a material adverse effect on the securitization markets and on the ability of issuers to hedge risk appropriately and meet investor demand.

In July of 2012, the Working Group on Margining Requirements (Working Group) of the Basel Committee on Banking Supervision and of the International Organization of Securities Commissions released a Consultative Document (First Consultative Document) on “Margin requirements for non-centrally cleared derivatives.” The Working Group released a second Consultative Document on the topic in February of 2013 (Second Consultative Document).

On April 12, 2011, the U.S. Department of the Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration and the Federal Housing Finance Agency (Prudential Regulators) released a notice of proposed rulemaking Regulators under Title VII of the Dodd-Frank Act regarding the establishment of minimum margin requirements applicable to non-centrally cleared swaps for swap dealers and major swap participants regulated by one of the Prudential (Prudential Regulators Proposed Rule).

In November of 2012, ISDA produced an outline, entitled “Initial Margin for Non-Centrally Cleared Swaps – Understanding the Systemic Implications” (ISDA Outline).

If you are interested in participating in SFIG’s Derivatives in Securitization Committee, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the First Consultative Document. Click here for the Second Consultative Document. Click here for the Prudential Regulators Proposed Rule. Click here for the ISDA Outline.



According to press reports appearing on July 25, 2013, several U.S. Senators, including Sherrod Brown (D-OH) and Mike Johanns (R-NE), will be introducing legislation that would give the Board of Governors of the Federal Reserve System (Federal Reserve) more flexibility in regulating insurance companies that have been designated as “systemically important financial institutions” by the Federal Stability Oversight Council (FSOC). Thus far, the FSOC has designated American International Group Inc. (AIG) and Prudential Financial Inc., the parent of the Prudential Insurance Company of America, as systemically important financial institutions. The FSOC reportedly may soon similarly designate MefLife Inc.

The insurance companies have raised concerns that the capital standards which the Federal Reserve may impose on systemically important financial institutions were developed in the context of banks and bank holding companies, and not in the context of insurance companies. The proposed piece of legislation, according to a press report from Bloomberg, “would remove insurers from regulations to establish minimum risk-based capital and leverage standards” for systemically important financial institutions.

In a speech entitled “Life Insurers as SIFI’s: A Case of Mistaken Identity,” delivered at the U.S. Chamber of Commerce’s “Capital Markets Summit” on April 6, 2013, MetLife Chief Executive Officer Steven A. Kandarian noted that:

I recognize that the bank capital framework is familiar to the Fed whereas the state-based insurance capital framework is not, but no amount of ‘tailoring’ will ever make bank capital standards fit a life insurer’s balance sheet. Applied literally to a life insurer’s balance sheet [bank capital standards] would constrain the availability and affordability of financial protection for consumers. Faced with unnecessarily large capital requirements, life insurers would either have to raise the price of the products they offer, reduce the amount of risk they take on, or stop offering certain products all together.

In a related development, in its Quarterly Report to Congress dated July 24, 2013 (SIGTARP Report), the office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) re-iterated its prior recommendation that AIG be designated as a systemically important financial institution “subject to the most comprehensive regulatory scrutiny…”

The SIGTARP went on to state:

Implementation of SIGTARP’s recommendation to designate AIG as systemically important is a necessary and positive step to repairing AIG’s lax regulatory environment that allowed for the company’s near-collapse, threatened financial stability, and contributed to the financial crisis and the taxpayers’ bailout of AIG. Subjecting AIG to the highest level of Federal regulation is necessary to mitigate the potential dangers to financial stability should AIG again find itself in severe financial distress. As FSOC explained, the Federal Reserve’s enhanced regulation will now require AIG to, among other things: (1) meet enhanced liquidity and capital standards; (2) undergo and report periodic stress tests; (3) adopt enhanced risk-management processes; (4) submit a resolution plan providing for its rapid and orderly resolution in the event of its material financial distress or failure; and (5) provide for the early remediation of financial distress at the company on a consolidated basis.

Click here for Mr. Kandarian’s speech. Click here for the SIGTARP Report.



The U.S. Senate’s Committee on Banking, Housing and Urban Affairs held a hearing on July 24, 2013 on “The FHA Solvency Act of 2013” (FHA Solvency Act). U.S. Department of Housing and Urban Development (HUD) Assistant Secretary Carol Galante testified. Ms. Galante is also a commissioner of the Federal Housing Administration (FHA).

Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) released a discussion draft of the FHA Solvency Act in connection with the hearing. As the name indicates, the FHA Solvency Act is meant to shore up the financial condition of the Mutual Mortgage Insurance Fund, the fund that backs the FHA’s insurance product. The FHA’s projected shortfall for the current fiscal year in the Mutual Mortgage Insurance Fund is approximately $1 billion.

The FHA Solvency Act would:

  • Raise the minimum for the FHA’s Mutual Mortgage Insurance Fund’s capital reserve ratio to three percent. If the capital ratio does not meet certain targets as it builds to the new minimum ratio, the bill would require HUD to take immediate action to address the shortfall, while keeping Congress fully informed.
  • Require minimum annual mortgage insurance premiums to improve the long-term solvency of the FHA program. The premium levels will be re-evaluated annually to ensure that the premiums cover loans’ expected risk and maintain the capital reserve ratio.
  • Require HUD to evaluate and revise, as necessary, underwriting standards using criteria similar to the CFPB’s ability-to-repay/qualified mortgage rule.
  • Require HUD to consolidate guidelines for lenders and servicers regarding the requirements, policies, processes, and procedures that apply to loans insured by FHA.
  • Provide HUD with new tools to hold lenders accountable for issuing inappropriate or fraudulent mortgages.
  • Help stabilize FHA’s reverse mortgage program by giving the HUD Secretary greater operational and regulatory flexibility.

Notably, Senators Johnson and Crapo stated that action addressing the FHA’s finances is “first on our housing agenda, followed closely by a broader housing reform effort.” This suggests that the Senate Banking Committee will put FHA solvency ahead of legislative efforts to “reform” Fannie Mae and Freddie Mac.

Commissioner Galante, in her testimony, also noted the need to update the FHA’s aging systems and infrastructure, as well as the need to address the FHA’s requirements for additional skill and expertise: “[f]or FHA to manage risk and maintain operations as a 21st century mortgage insurer, these constraints must be dealt with appropriately.”

Click here for the FHA Solvency Act. Click here for a “fact sheet” prepared by the Senate Banking Committee on the FHA Solvency Act. Click here for Commissioner Galante’s testimony.



On July 24, 2013, the U.S. Senate passed the “Bipartisan Student Loan Certainty Act” (Senate Bill) on an 81 to 18 vote to drop student loan interest rates back down to 3.86% for the next academic year. As a result of the U.S. Congress’ failure to act by July 1, the fixed rates of interest that applied prior to that date doubled to 6.8%. The Senate Bill is retroactive to July 1, and closely resembles the bill passed by the U.S. House of Representatives on May 23, 2013, entitled the “Smarter Solutions for Students Act” (House Bill). The House Bill passed on a largely party-line vote of 221-198.

Both the Senate Bill and the House Bill would index Government-guaranteed student loans in future years off of the 10-year U.S. Treasury note, although the margins and maximum rate caps differ.

Although under the Senate Bill the rate that attaches to any particular loan would be fixed, based on the 10-year Treasury note rate as of the prior June 1, the expectation is that interest rates will increase in coming years, leading to higher rates for the applicable 10-year Treasury note rate. Thus the rates on student loans originated in the future are expected to be higher.

Some U.S. Senate Democrats opposed the Senate Bill, including Senator Elizabeth Warren (D-MA). Senator Warren and Senator Jack Reed (D-RI) resisted the Senate Bill on the grounds that it represented a “teaser rate for our student loan system” [that would result in the Government receiving] “$184 billion in profits over the next 10 years.”

Please see the May 22, 2013 edition of the SFIG Newsletter for a more in-depth discussion of student loans.

Click here for the Senate Bill. Click here for the floor amendments to the Senate Bill. Click here for the House Bill.



ABS Vegas 2014 – January 21-24, Las Vegas, Nevada. Click here for more information.

SFIG is now accepting sponsorship contracts for this conference. If you are interested, please contact SFIG.



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.


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.


Contact us at info@sfindustry.org


Structured Finance Industry Group
WebsiteEmail Us | Web Archive

To unsubscribe from this email listing, please click here.

Terms and Conditions | Privacy Policy