Are FHLBs the Answer to Jump-Starting Securitizers?
By Brian Collins
Private-label security issuance may be scarce these days, but there seems to be an endless supply of ideas on how to revive the market — from the much-discussed to the novel. Many of the industry letters providing input to the Treasury Department on jump-starting the PLS sphere endorsed somewhat obvious steps, such as a more appealing regulatory environment or less dominance by Fannie Mae and Freddie Mac. But some commenters threw newer options into the pot. Perhaps the most original idea came in the proposal from Redwood Trust, which noted the Federal Home Loan Bank System could be an “anchor buyer” of private-label securities to attract broader participation. “We suggest allowing the FHLBs to acquire and hold the highest rated, highest quality triple-A securities,” which “would decrease volatility and reduce the bid/ask spread on any given day,” executives from the company said in a letter to Treasury. Other proposed solutions include the so-called “RMBS 3.0”, a new comprehensive set of PLS standards developed by the Structured Finance Industry Group. Another letter even focused on expanding covered bonds as an alternative to securitization. Treasury requested comment in June on strategies for developing a “responsible” PLS market, asking for input on what obstacles are holding back securitization, how to address those hurdles, and the appropriate roles for the government and the private sector in the market’s future, among other issues. “Once the structural issues are resolved to the satisfaction of AAA investors, if there still is no relative activity in the RMBS market, what we are suggesting is the need for an anchor buyer for a period of time,” said Redwood spokesman Mike McMahon in an interview. It is still too early to tell if such an idea has legs. Some observers say a role for FHLB system could be considered, but carries new risks. The Home Loan banks themselves, meanwhile, have not expressed interest in getting involved. “It is an interesting idea that deserves serious thought,” Karen Shaw Petrou, managing partner at Federal Financial Analytics, said in an interview.