Since being installed as Securities and Exchange Commission chairman in April, Paul S. Atkins has been busy declaring a “new day” at the agency, distancing it from the previous administration, often by underlining support for crypto asset innovation. But other, longer-festering issues do not lend themselves so easily to clean breaks and proclamations.
Such is the case with residential mortgage-backed securities. Noting that there have been no public RMBS offerings since 2013, the SEC in late September issued a concept release, seeking comments on how regulation of this asset class, and of asset-backed securities (ABS) more generally, may be impeding market functioning and contributing to high borrowing costs.
Public RMBS and ABS offerings “play a vital role in the U.S. capital markets and the U.S. economy,” Atkins said at the start of the comment period, which closes on December 1. “The concept release is the first step in the commission’s efforts to revitalize the public market for RMBS and modernize the agency’s regulations of ABS.”
Paul Atkins: “Efforts to revitalize.”
Atkins pointed out that while public RMBS has been moribund, “there have been over $100 billion in RMBS issuance annually in the Rule 144A market for five of the past six years. It is important for the commission to hear from market participants on steps it can take to revive the public RMBS market,” whose presumed advantages include “increased liquidity, a broader investor base, and greater transparency and public disclosure.”
Some institutions are prohibited from investing in private securities, thereby limiting the size and depth of the liquidity pool.
Atkins flagged a public-market disincentive in Dodd-Frank Act amendments to Regulation AB, requiring “baseline” asset-level disclosures of approximately 105 data points for each mortgage, and “up to another 165 data points upon the occurrence of certain events.”
He expressed hope that the comment process will lead to “more public offerings, thereby facilitating capital formation while maintaining investor protection.”
Caroline Crenshaw, the SEC’s holdover Democratic commissioner, asserted in a statement of her own that regulations have depressed registered RMBS issuance. She encouraged commenters to “question the premise driving the [concept] release.” RMBS issuance was negligible even before the so-called Reg AB II, with only one public deal since 2009, she said, urging them to “think broadly in formulating their suggestions, and not simply acquiesce in the deregulatory zeitgeist.”
Non-agency RMBS issuance has grown significantly from post-financial crisis lows. Rule 144A offerings dominate, with no SEC-registered issuance and only $2.5 billion placed through traditional private offerings in 2024. (Source: Asset-Backed Securities Markets: Issuance and Structure, Table 4, page 5.)
The impact of the SEC exercise “could be at the margins, or it could be significant, we don’t know,” said Michael Bright, chief executive officer of the Structured Finance Association (SFA). More investors and their capital could enable more issuers to access the market, at lower rates.
Getting a public deal done is “time-consuming and expensive,” remarked Mayer Brown partner Haukur Gudmundsson. A lot of the required data points “are difficult for issuers to obtain or irrelevant to investors.”
An SFA task force is “literally mapping the data fields required for public deals to those for private-placement 144A deals, to determine whether certain fields make sense for the public market or not,” Bright noted. “Every field falls into one of three buckets”: required, completely extraneous, or non-applicable if there is an explanation.
Michael Bright of the SFA
Among other possible inhibiting factors is the mortgage-market dominance of the government-sponsored enterprises Fannie Mae and Freddie Mac, which are in federal conservatorship, though the concept release is more focused on the loan-level data requirements and on how the RMBS business has changed over time.
“Zip codes is a big one,” Bright said. Discussions are ongoing about whether disclosing three digits of a zip code would be personally identifiable, “and investors are coming up with ideas, such as establishing a secure room that only accredited persons have access to.”
The concept release also discusses definitions of “ABS,” which under Reg AB and the Securities Exchange Act of 1934 are similar but dictate different outcomes. The Exchange Act definition encompasses more ABS types, such as collateralized loan obligations (CLOs). Reg AB identifies certain core principles for ABS to be eligible for registration and reporting under that rule.
The release says market participants need to analyze the nuances of the definitions to determine whether various ABS structures conform to one of the definitions, neither, or both, and “what the ramifications might be.” For example, investors in public-utility securitizations issued through a stand-alone trust or from an ongoing shelf registration could receive different disclosures at different frequencies; entities issuing from a shelf may be unable to access the public ABS market.
Given evolving and increasingly complex ABS transactions, the concept release asks whether aligning the definitions more closely could lessen market confusion and broaden interest in ABS.
“Such revisions may bring clarity and uniformity to the current ABS regulatory regime and remove potentially unnecessary definitional and/or structural impediments to accessing the registered market for ABS issuers and investors, while providing sufficient flexibility and accommodating future developments in the ABS market,” the SEC document says.