June 26, 2013 Newsletter
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Structured Finance Industry Group


Issue Spotlight

Recent Developments


During last week’s Global ABS 2013 conference in Brussels, Belgium, SFIG representatives met with regulators from the Bank of England and from the European Banking Authority, as well as with officials of the European Data Warehouse and of Prime Collateralized Securities.  The primary purposes of these meetings were to acquaint the European regulators and other industry participants with SFIG and its mission and to develop a framework for future discussions as U.S. and European rulemaking processes intertwine.



In advance of the Brussels meetings described above, SFIG representatives held additional meetings in Washington, D.C. with U.S. policymakers, both to acquaint them with SFIG generally and to discuss specific areas of concern.  Recent meetings included: staff members of the U.S. Senate Committee on Banking, Housing and Urban Affairs; staff of Senator Thad Cochran (R-MS), the ranking member of the U.S. Senate Committee on Agriculture, Nutrition and Forestry; staff members of the Federal Deposit Insurance Corporation.

In addition, following SFIG’s participation in the May 14, 2013 “Credit Ratings Roundtable” organized by the Securities and Exchange Commission (SEC) and SFIG’s subsequent submission of a comment letter as a follow-up to the Roundtable, SFIG is working to support the SEC’s agenda by helping to provide additional market insight, specifically from the investor community.

Earlier this week, SFIG met with several policymakers and their staffs to introduce SFIG and SFIG’s leadership, including SFIG’s Chairman, Reggie Imamura and Executive Director, Richard Johns. The SFIG representatives met with Mary Miller, Under Secretary for Domestic Finance, U.S. Department of the Treasury; Governor Elizabeth Duke, Board of Governors of the Federal Reserve System; senior staff to the U.S. House of Representatives Committee on Financial Services; Ed DeMarco, Acting Director, Federal Housing Finance Agency; and officials of the Office of Financial Institutions and Business Liaisons at the Consumer Financial Protection Bureau.

While these were introductory meetings and not designed to focus on any particular area of advocacy, there was substantial discussion about whether a piecemeal approach to regulating securitization, and in particular the private-label residential mortgage securitization market may be constraining the return of private capital to the mortgage market.

SFIG’s leadership believes that there is an opportunity for SFIG to provide a broad overview on how the market should operate on issues including data standards, the roles and responsibilities of the various parties, legal and regulatory constraints, and tax and accounting issues.  There is also an interest in obtaining industry guidance on how to create regulatory and industry standards that promote liquidity and protect investors, while allowing issuers the flexibility necessary to tailor transactions to unique products and to innovate in ways that will increase efficiency and benefit consumers.

The need for this overview is growing with the continued development of the Federal Housing Financing Agency’s Common Securitization Infrastructure, the introduction of the Corker-Warner government-sponsored entity (GSE) reform legislation and the imminent risk sharing transactions from the GSEs.  SFIG has the opportunity to share its members’ views to policymakers on the similarities and differences between GSE issuance and private label issuance, and how these markets are interrelated but distinct.  By taking that opportunity, SFIG would also be in a position to present its members’ views regarding how a sound and integrated regulatory environment can facilitate a responsible and sustainable private-label residential mortgage securitization market.

Editor’s Note:  While in prior communications we have highlighted our enthusiasm for such open and co-operative engagement with our industry's regulators and legislators, we should make clear that policymakers, including in particular the SEC and its staff, have not affirmatively endorsed our organization or commented on the success of its mission.

SFIG is firmly committed to its mission and recognizes that its ultimate success will be measured by the breadth of its membership and the representativeness of its advocacy.  We believe that our outreach to policymakers to date has been positive and productive.  We look forward to continued, constructive dialogue that will assist policymakers as they craft effective and balanced regulations affecting our industry.



Beginning next month, the Internal Revenue Service (IRS) will open its secure online web portal for foreign financial institutions (FFIs) to register with the IRS to comply with the Foreign Account Tax Compliance Act (FATCA).  Many key players in structured finance transactions are affected by the FATCA registration requirements, including non-U.S. banks, custodians, insurance companies and investment entities.

Under FATCA, after December 31, 2013, withholding agents must generally withhold a 30% tax on payments of U.S.-source passive income (such as interest and dividends) made to FFIs and certain non-financial foreign entities (NFFEs).  An FFI can avoid FATCA withholding tax by agreeing to report certain information to the IRS about its U.S. accountholders and their accounts.  

FFIs agree to report this information to the IRS by registering to become FATCA-compliant on the IRS’s online FATCA registration portal.  Upon approval by the IRS of the FFI’s registration, the IRS will issue a global intermediary identification number (GIIN), to each registered FFI (the IRS will begin issuing GIINs in October 2013). Subsequently FFIs may report their FATCA-compliant status by providing an accurate and complete IRS Form W-8 (as revised for FATCA), including the FFI’s GIIN, to a withholding agent.  The withholding agent may verify an FFI’s claim of FATCA-compliant status to others by checking the FFI’s GIIN against the IRS’s published FFI list.

The IRS will publish electronically the list of FFIs that have registered with the IRS.  The first version of this list will be posted online in December of 2013.  To be included on the first version of the list, an FFI must be registered with the IRS via the FATCA portal on or before October 25, 2013.  The IRS intends to update the list of registered FFIs on a monthly basis.

History of FATCA

On January 17, 2013, the U.S. Treasury Department and the IRS issued final regulations under FATCA.  The final FATCA regulations were the culmination of multiple rounds of administrative guidance and proposed regulations issued over the previous two years.

Of particular importance to the securitization industry is that the final FATCA regulations grandfathered out of the regime certain obligations issued on or before December 31, 2013.  Debt instruments, swaps and other non-equity instruments issued or entered into this year, and not significantly modified after this year, will not be subject to withholding taxes under FATCA. As described below, debt instruments issued starting in 2014 will be subject to FATCA.  

To address non-U.S. legal impediments to the implementation of FATCA, the U.S. Treasury Department and the IRS are collaborating with other governments to develop alternative intergovernmental approaches that are instituted through intergovernmental agreements (IGAs).  The purpose of the IGAs is to eliminate conflicts of law while achieving the intent of the FATCA statute.  Additionally, the IGAs are expected to simplify FATCA compliance and withholding issues by providing a streamlined process for non-U.S. entities to comply with FATCA.  The FATCA compliance procedures for non-U.S. entities in countries that have agreed to an IGA generally are specific to the relevant IGA.

FATCA Withholding Taxes on Payments to Securitization Vehicles

Securitization vehicles and securitization transactions generally are structured such that they will receive payments free from all withholding taxes.  To avoid FATCA withholding tax, non-U.S. securitization vehicles may wish to draft their transaction documents to provide for the authority and affirmative obligation to comply with FATCA.  In certain cases, FATCA compliance may require a non-U.S. securitization vehicle to register with the IRS.  In other cases compliance may only require disclosure to the IRS of the securitization vehicle’s substantial U.S. owners, if any (generally a ten percent ownership threshold).

FATCA Withholding Taxes on Payments by Securitization Vehicles

Debt instruments issued by securitization vehicles prior to January 1, 2014 are not subject to FATCA withholding taxes, unless such instruments are significantly modified after December 31, 2013.  For debt instruments issued or significantly modified after December 31, 2013, payments to investors of U.S. source interest (including original issue discount), dividends, rents and other fixed, determinable, annual, periodical (FDAP) income may be subject to FATCA withholding tax beginning in 2014.  Payments to investors of gross proceeds from the sale or other disposition of instruments that can produce U.S.-source interest or dividends may be subject to FATCA withholding taxes beginning in 2017.  It is market practice for U.S. borrowers, including securitization vehicles, not to gross-up lenders and investors for withholding taxes.  Because the avoidance of FATCA withholding taxes is within the investors’ control, U.S. borrowers will likely not gross-up for FATCA taxes either.  To avoid FATCA withholding taxes, investors that are FFIs or NFFEs must comply with FATCA information collection and withholding requirements, and all other investors must show that they are not an entity subject to FATCA, which can be done by providing an IRS Form W-8 (as revised for FATCA).

FATCA Withholding Taxes on Payments with Respect to Swaps

Swap confirmations entered into prior to January 1, 2014 are not subject to FATCA withholding taxes, unless the related agreements are amended or modified after December 31, 2013.  For swap confirmations entered into, amended or modified after that date, payments with respect to swaps may be subject to FATCA withholding beginning in 2014.  Such payments may include pass-through payments with respect to the underlying collateral posted for a swap (such as interest on U.S. Treasury securities).  Swaps can generally be structured to avoid FATCA withholding taxes, including by using non-U.S. collateral where pass-through payments otherwise may be subject to FATCA withholding taxes.

The ISDA FATCA Protocol provides that counterparties will not be entitled to indemnification for FATCA withholding tax.  The ISDA FATCA Protocol is inconsistent with the general requirements of most securitization vehicles, which require the counterparty to indemnify the securitization vehicle for all taxes and the securitization vehicle to indemnify the counterparty for no taxes.

FATCA Considerations in Structuring Securitization Transactions

  • Providing securitization vehicles with the authority and obligation to collect and report any information they may be required to collect and report with respect to FATCA;
  • Providing securitization vehicles with indemnification for FATCA-related costs resulting from investors’ action or inaction;
  • Excluding from indemnification requirements imposed on securitization vehicles both FATCA withholding taxes and costs related to complying with FATCA;
  • Providing for a termination event upon the imposition of FATCA withholding tax; and
  • Analyzing increased costs that may be associated with FATCA compliance.

SFIG will continue monitoring evolving issues with respect to FATCA and its implementation, including the IRS’s plans to issue additional guidance with respect to FFI registration under FATCA and the impact of IGAs with respect to the implementation of FATCA and cross-border tax information sharing.  If you are interested in joining SFIG’s Tax Policy Committee, please contact SFIG at Richard.Johns@sfindustry.org



On June 25, 2013, the “Housing Finance Reform and Taxpayer Protection Act of 2013” (Proposed Bill) was introduced in the U.S. Senate by Senators Bob Corker (R-TN), Mark Warner (D-VA), Mike Johanns (R-NE), Jon Tester (D-MT), Heidi Heitkamp (D-ND), Dean Heller (R-NV) and Jerry Moran (R-KS).

The Proposed Bill would reform the system of mortgage finance in the United States by abolishing the Federal Housing Finance Agency, Fannie Mae and Freddie Mac, and replacing them with a new Federal Mortgage Insurance Corporation.

The Proposed Bill was the subject of the “Issue Spotlight” in last week’s SFIG Newsletter.  Please refer to that edition of the Newsletter for more details about the Proposed Bill.

If you are interested in participating in SFIG’s advocacy efforts relating to the reform of Fannie Mae and Freddie Mac, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the latest draft of the Proposed Bill.  Click here for a Politico article written by the Proposed Bill’s sponsoring Senators.



On June 25, 2013, the U.S. Senate’s Committee on Banking, Housing and Urban Affairs held a hearing on “Private Student Loans: Regulatory Perspectives.”  The witnesses were Rohit Chopra, Student Loan Ombudsman at the Consumer Financial Protection Bureau; John Lyons, Senior Deputy Comptroller for Bank Supervision Policy and Chief National Bank Examiner, Office of the Comptroller of the Currency; Todd Vermilyea, Senior Associate Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System; and Doreen Eberly, Director of Risk Management Supervision, Federal Deposit Insurance Corporation.

In their testimony, several of the witnesses stressed that their agencies had policies in place to assist student loan borrowers who may be facing hardships, including allowing banks to grant extended grace periods for student loan repayment that go beyond what is permitted for other types of consumer credit.  For long-term hardship cases, banks may permanently reduce the interest rate or otherwise modify payments to assist the borrower.

The testimony also included a current overview of the student loan market:

  • Outstanding student loan debt, at $1.2 trillion, is greater than any other consumer loan product with the exception of residential mortgages.
  • Outstanding student loan debt was the only form of household debt that continued to rise during the financial crisis.
  • Government-guaranteed student loan debt represents 85% of outstanding student loan debt, and private loans represent 15%.  Of new (2012) originations, 93% of student loan debt was Government-guaranteed.  
  • In 2012, 11.7% of all student loan balances were delinquent.  However, 44% of outstanding student loans were still in their deferment period and did not have payments due.  When these loans are backed-out, the 2012 delinquency rate increases to 21%.  In 2004, only 6.3% of student loan balances were delinquent.
  • The delinquency rate among private (non-Government-guaranteed) student loans is approximately 5%.  Almost 90% of private student loan balances require a guarantor or co-signer, usually a parent or legal guardian.

If you are interested in joining SFIG’s Student Loan Committee, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for Mr. Chopra’s testimony.  Click here for Mr. Lyons testimony.  Click here for Mr. Vermilyea’s testimony.  Click here for Ms. Eberly’s testimony.



On June 24, 2013, the U.S. Supreme Court agreed to review the decision of the U.S. Court of Appeals for the D.C. Circuit in National Labor Relations Board v. Noel Canning.  In that case, the Court of Appeals ruled that three recess appointments made by President Obama to the National Labor Relations Board were unconstitutional.  Assuming that the recess appointments were unconstitutional, actions taken by the National Labor Relations Board during the period following the appointments may be invalid, as the National Labor Relations Board would have lacked a quorum at that time.

Recess appointments are those made by the President when the U.S. Senate is not in session, thus bypassing the usual confirmation process for the President’s nominees.

Richard Cordray, the Director of the Consumer Financial Protection Bureau (CFPB) is also a recess appointment.  Were Mr. Cordray’s nomination to be called into question, so might actions taken by the CFPB since his appointment, including the CFPB’s promulgation of the ability-to-pay/“qualified mortgage” rule.



On June 19, 2013, the Mortgage Bankers Association (MBA) released a concept paper entitled “Keys to Expanding Credit Access: A Common Credit Box and Clearer Representations and Warranties” (Concept Paper).  The Concept Paper is one of a series of papers the MBA is releasing in connection with the transition of the mortgage finance markets away from the two Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, towards a secondary market operating with an explicit, limited government guarantee.

Highlights of the Concept Paper include the following recommendations made by the MBA:

  • Fannie Mae and Freddie Mac should undertake to develop transparent and consistent credit underwriting guidelines, rather than perpetuate the “black box” approach which the MBA asserts has been the prevailing approach to underwriting guidelines.  The GSEs should also discontinue the use of “underwriting variances” negotiated between the GSEs and their largest customers.
  • The two GSEs should have identical underwriting guidelines by the end of the year for all products or, alternatively, one of the two GSE underwriting systems should be abandoned.
  • While noting that “[l]enders fully accept responsibility for manufacturing defects within their origination process… lenders do not accept responsibility for credit risk that is part and parcel of the credit standards set by the GSEs,” the MBA suggested that repurchase obligations should be based on clear standards for defining a material defect and a common understanding of when such defect has a causal link to default.

Representatives of SFIG’s Residential Mortgage Committee have met with representatives of the MBA to develop coordinated responses to a variety of issues facing the residential mortgage market.  If you are interested in participating in these activities, please contact SFIG at Richard.Johns@sfindustry.org.  

Click here for the Concept Paper.



At its meeting on June 19, 2013, the City Council of North Las Vegas, Nevada (City) took a step closer to pursuing an eminent domain strategy with respect to “underwater” mortgages.  At the meeting, the City Council voted to approve the City’s entering into an Advisory Services Agreement with Mortgage Resolution Partners LLC (MRP).

North Las Vegas is one of several, and the largest city to date, to enter into an Advisory Services Agreement with MRP.  Under the Advisory Services Agreement, MRP will undertake a survey of underwater mortgages (mortgages in which the outstanding principal balance of the mortgage note exceeds the current fair market value of the property) and report back to the City.  No eminent domain proceedings have yet to be undertaken by the City.

The City Council’s vote was 4 to 1.  In July, two current members of the City Council, both of whom voted in favor of engaging MRP, will be stepping down and succeeded by newcomers.

While MRP is conducting its inventory of underwater mortgages, the City indicated that it will be soliciting an outside legal counsel’s review of the proposed strategy and reviewing existing federal, state and non-profit housing assistance programs.

The City’s move prompted industry trade associations, including the Securities Industry and Financial Markets Association, the Association of Mortgage Investors, the Greater Las Vegas Association of Realtors and the Nevada Bankers Association to express their disappointment over the City’s action.

Please contact SFIG at Richard.Johns@sfindustry.org if you would like to be included in SFIG’s advocacy efforts on the eminent domain topic.

Click here for the Las Vegas Sun’s June 19, 2013 article regarding the City Council meeting.



On June 19, 2013, a paper entitled “A Pragmatic Plan for Housing Finance Reform” (Plan), authored by four prominent experts in housing finance and policy, was released by Moody’s Analytics, the Urban Institute and the Milken Institute.  The authors were Ellen Seidman, Senior Fellow at the Urban Institute, Phillip Swagel, a Scholar at the Milken Institute, Sarah Rosen Wartell, President of the Urban Institute and Mark Zandi, Chief Economist of Moody’s Analytics.  

Many of the ideas proposed in the Plan are similar to the thinking reflected in the most recent draft of the proposed piece of legislation being developed by U.S. Senators Bob Corker (R-TN) and Mark Warner (D-VA), the “Secondary Mortgage Market Reform and Taxpayer Protection Act of 2013” (Corker-Warner Bill) referenced earlier in this edition of the Newsletter.  Both the Plan and the Corker-Warner Bill call for the abolishment of the Federal Housing Finance Agency and of the two Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac.  A new Federal Mortgage Insurance Corporation (FMIC) would be established that would both issue guarantees of qualifying mortgage-backed securities and also act as the overall regulator of the secondary mortgage markets.

The Plan’s authors note that there are two opposing schools of thought regarding the future of housing finance in the United States.  One emphasizes a continued, robust federal Government involvement, and the alternative emphasizes varying degrees of privatization.  The authors suggest that continued Government involvement exposes taxpayers to substantial risk and would likely stifle innovation, ultimately reducing mortgage choices.  Full privatization, they argue, would unacceptably reduce access to mortgage credit and would result in substantial future taxpayer-funded support:

“Recent experience strengthens our conviction that policy makers would feel obligated to stabilize the housing finance market during times of turmoil.  Moreover, without an upfront acknowledgement of government’s limited guarantee, taxpayers would not be compensated for the risk they inevitably would bear.”

The authors suggest a middle ground, similar to that envisioned in the Corker-Warner Bill, in which qualifying issuers issue mortgage-backed securities which are then guaranteed by FMIC-regulated private mortgage insurers.  The FMIC would then provide a “full faith and credit” guarantee on these mortgage-backed securities.

The authors predict that mortgage rates will be higher in the future than they were in the years prior to the housing crash.  They believe that a 40 basis point guarantee fee would be an appropriate fee level for the FMIC, which they state is twice the level of the guaranty fee charged by the GSEs prior to the crash.  They believe mortgage rates would be 100 basis points higher in a purely privatized market.

The Plan also suggests that the private insurers could effectively re-insure their risks through the capital markets by the use of credit default swaps.

Further, the Plan envisions that a component of a new housing finance paradigm for the United States would be a “research and development” function built around a “market access fund” (MAF), to be funded with a 6 basis point assessment on all mortgage-backed securities, whether or not guaranteed by the FMIC.  The moneys in the MAF would provide explicit credit enhancement and direct subsidies, including subsidies for rental housing.

Like the Corker-Warner Bill, the Plan anticipates that the GSEs’ “affordable housing goals” would be abolished.

If you are interested in being involved with SFIG’s advocacy efforts relating to the residential mortgage markets and GSE reform, please contact SFIG at Richard.Johns@sfindustry.org.

Click here for the Urban Institute’s press release concerning the Plan.  Click here for the Plan.  




Please note that the SFIG Newsletter will not be published next week due to the Independence Day holiday.

SFIG is pleased to announce that its inaugural Summer Symposium followed by a cocktail reception on Wednesday, June 26, 2013 has been met with an overwhelming response and registration is now closed.  The event will be held from 5 pm to 8 pm at the offices of Skadden, Arps, Slate, Meagher and Flom LLP, Four Times Square, New York, New York.  

The agenda will include three parts:  a panel discussion on “Credit Rating Agency Reform – Assessing the Feasibility of a Credit Rating Agency Assignment System,” a presentation on “Dodd-Frank Swap Clearing Requirements and Potential Impact on Securitization;” and a panel discussion on “The Return of a Sustainable RMBS Market – Inhibitors and Drivers.”

Please note that SFIG will not be able to accommodate members of the press at this event.

Click here to register for the Symposium, and for more details.  

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 click here.



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 to learn about membership opportunities.


Contact us at info@sfindustry.org


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