U.S. SEC considers relaxing post-crisis structured mortgage product rules

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By Katanga Johnson

WASHINGTON (Reuters) – The U.S. Securities and Exchange Commission (SEC) on Wednesday said it was seeking feedback on whether disclosure rules were discouraging firms from issuing SEC-registered residential mortgage-backed securities (RMBS) as the Trump administration seeks to overhaul the U.S. housing finance market.

The move, which follows five years of limited activity in the SEC-registered RMBS market, could result in the SEC loosening disclosure requirements introduced in the wake of the 2007-2009 subprime mortgage crisis.

SEC Chairman Jay Clayton said that he had asked agency officials to review SEC disclosure requirements for RMBS introduced in 2014 in a bid to revitalize offerings for these products and help boost capital formation in the housing market.

With the future privatization of Frannie Mae and Freddie Mac, the RMBS market will likely shrink and decrease funding available for home loans without changes.

“Potential issuers of SEC-registered RMBS have expressed concerns regarding the scope and interpretation of disclosure requirements,” Clayton said in a statement. “In light of the absence of SEC-registered RMBS offerings, I have asked SEC staff to review our RMBS asset-level disclosure requirements with an eye toward facilitating SEC-registered offerings.”

The review was recommended by the U.S. Treasury Department in its blueprint published last month for removing mortgage giants Fannie Mae and Freddie Mac from government control. The pair, which guarantee over half the nation’s mortgages, were put into conservatorship in 2008 as losses mounted on their subprime mortgage portfolios

RMBS are a type of asset-backed security comprised of bundled loans, such as mortgages, student loans or auto loans. The loans are typically packaged in risk tranches, with holders of low-risk loans like 30-year-fixed mortgages paid first, and investors in high-risk assets such as subprime mortgages paid afterward. Many crisis-era RMBS investors did not fully appreciate their level of risk exposure to the subprime tranche.

Following the crisis, the agency introduced rules requiring SEC-registered RMBS issuers to provide greater information, including 270 different data points, about the quality of underlying loans. These requirements can be difficult to satisfy and may have stymied private-label securitization, the Treasury said last month.

By contrast, Fannie and Freddie RMBS offerings require only 100 data points. The pair have issued nearly $4.5 trillion of RMBS since 2014.

The SEC said it was seeking comment on, among other issues, whether the SEC should implement a “provide-or-explain regime,” which would allow an issuer to omit any asset-level data point, as long as the issuer identifies the omitted field and explains why it cannot provide the information.

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