Tom Deutsch

The securitization industry has its work cut out for it in 2012, with major Dodd-Frank rules set for implementation during the year and ongoing economic turbulence showing little signs of subsiding. Tom Deutsch, executive director of the American Securitization Forum, recently spoke with Securitization Intelligence about what’s in store for the industry this year, and whether the market will be able to grow despite the regulatory and economic headwinds.

SI: Does the move to Las Vegas signal a mood change in the securitization industry, despite the economic uncertainty of the last year?

Deutsch: We certainly expect there to be a mood lift from having everyone in same, first-class facility at the Aria as opposed to being spread throughout the city in a number of different hotels like we were in Orlando and Washington. This year, we have almost exclusive use of the Aria, which has over 4,000 hotel rooms and nearly twice as much one-on-one meeting space in the conference center than we
had last year. The venue is much more right-sized to this event, which is the largest capital markets event in the world with approximately 4500 attendees expected. In the past couple weeks, every issuer and investor I have spoken with have told me that they are completely booked up with meetings with clients, so our aim to provide the most conducive setting for business meetings appears to have been achieved. The return to Las Vegas is effectively an attempt to return to business as usual, even though we obviously have some pretty significant hurdles still to clear in our market right now.

SI: Where does the industry stand heading into the conference?

Deutsch: I think we’ve arrived at the new normal for most of the consumer ABS asset classes, but we clearly haven’t made much progress on the RMBS or CMBS fronts, where issuance volumes still remain extremely low. The question now is whether and when will the federal government get out of the way of private-label RMBS, and how will the private markets respond when/if they do? There was a lot more optimism last year that something on GSE reform could get seriously debated in the first part of this Congress. But I think going into 2012, particularly with the recent spat that we saw over the Richard Cordray’s recess appointment as CFPB Director, it seems extremely clear that there will be limited, if any, serious progress made in Congress on the things that are going to be instrumental in determining the fate of the GSEs.

Most of the work that Congress will do this year will be laying the groundwork for 2013. Given the enormity of ideas around GSE reform, it’s not a terrible idea to have a full year of getting proposed legislation right. But given the split in Congress between Democratic control of the Senate and Republican control of the House, it’s extremely unlikely that anything will move forward in 2012 that would result in material changes.

SI: What are the ASF’s objectives for the coming year?

Deutsch: The biggest priority for the ASF in the coming months is going to be a significant gear shift from working on regulatory comments to moving towards common industry implementation of final regulatory rules. We have a significant amount of work to do surrounding other Dodd-Frank rule makings that are going to occur with certainty in 2012—items such as the Volcker rule, Section 621 which addresses conflict of interest, and alternatives to ratings for risk-based capital. I also expect the Securities and Exchange Commission will release final Reg AB II rules in the next month or so.

With Reg AB II, risk retention and the myriad of other Dodd-Frank rules expected to come out in final form though in 2012, we’re going to see an enormous amount of ASF member time invested in creating the market standards and practices that are going to be critical for new transactions to get done on a timely and efficient basis. I believe that is ultimately what the ASF is best-positioned to do over the course of the next couple years—create market standards and practices that lowers the implementation costs to ASF members to comply with the massive flow of Dodd-Frank regulation coming out.

SI: Do you think there are still significant changes to federal mortgage programs like HARP to come from the Obama administration? With a lack of knowledge on what policy changes are in the pipeline, how can investors prepare for the evolving refinance and prepayment atmosphere?

Deutsch: I wouldn’t expect any new changes from the administration on either homeownership preservation policy or massive refinance policies. I think they’ve shot all the bullets that they can shoot. And federal deficit hawks are going to be pretty guarded with handing out any new costly bullets. The presidential election could shake things up a bit, but a returning Obama or a new Republican Administration would have to dig a lot of coins out of the couch cushions to produce additional effective policy changes. External events to the housing market, like the European sovereign debt crisis, will likely be much more impactful to the value of outstandings.

SI: Is the ASF closely tracking the ongoing legal battles over put-backs in soured RMBS and the group of state attorneys general’s settlement with the mortgage servicers? What do you think may happen with those cases in 2012?

Deutsch: The amount of litigation related to RMBS will continue to be substantial in 2012 and beyond I think. For the past year, I have expected to see some formal, final settlement with the attorneys general within weeks, but that process continues to be ongoing with no clear end in sight. Last year, a group of ASF members and staff even flew out to Iowa to meet with a big group of the state attorneys generals’ staff to impress upon them that our investor and guarantor members continue to be very fearful of how the attorneys generals could impose a settlement that would ultimately impair the value of outstanding RMBS, even though the investors are passive participants in the servicing of the assets. Our markets are going to be filled with the acrimony related to litigation for some time but hopefully at some point that acrimony subsides and the industry can focus back on new deal making that gets more credit flowing back to consumers again.

SI: With no end in sight for litigation, regulatory uncertainty and slow or flat industry growth, will 2012 be a lost year for securitization?

Deutsch: Absolutely not. I think there are a number of areas like autos and emerging assets that will continue to evolve—and hopefully increase—in overall issuance volumes. But even for areas like RMBS and CMBS I think there’s still going to be traction gained on getting some new deals out. I fully expect we’ll see a number of newly originated collateral transactions, but we won’t see any kind of return to normal in the RMBS and CMBS markets for some time.

SI: What are the asset classes getting the most buzz this year?

Deutsch: Auto ABS will continue to see the largest issuance volumes by an exponent over other areas in the securitization sector. More unique transactions such as whole business securitizations and other types of intellectual property royalties may see some growth, but those overall issuance numbers will look like rounding errors compared to the historical RMBS volumes that are missing from today’s market.

Solar panel ABS has definitely gotten a lot of buzz, but there is more work involved there for issuers to get investors and rating agencies convinced of the stability of the cash flows over time, since there is relatively limited historical data. The underlying solar panel assets are being originated at a relatively brisk pace, so there’s a demand at the consumer level, but there’s still some time before it translates to the securitization level.

SI: Last year the market seemed optimistic for the long-awaited RMBS Renaissance—this year, less so. When will we see regular private-label RMBS issuance?

Deutsch: That’s the trillion dollar question for the markets to figure out. I don’t think anyone expects 2012 or even 2013 to be any kind of banner year for the RMBS market. I think a lot of the debate about private-label RMBS restart is path-dependent on the debate around Fannie, Freddie and FHA. If we continue to have very high conforming GSE loan limits in the $600,000 range, that’s going to leave very little jumbo collateral for the private markets to securitize. Since 2007, everyone has looked towards the next year as the beginning of a return to normal. Unfortunately, each year the MBS markets are frustrated by the absence of that return. I don’t think anyone at this point can make a stellar prediction as to when we’ll see a return to normal in the MBS markets.