The Senate Banking Committee Subcommittee on Securities, Insurance and Investment held a hearing yesterday entitled “Securitization of Assets: Problems and Solutions.” Testifying at the hearing were the following witnesses:
- Patricia McCoy, George J. & Helen M. England Professor of Law, University of Connecticut School of Law
- George P. Miller, Executive Director, American Securitization Forum
- Andrew Davidson, President, Andrew Davidson & Co.
- J. Christopher Hoeffel , Executive Committee Member, Commercial Mortgage Securities Association
- William Irving, Portfolio Manager, Fidelity Investments
Subcommittee Chairman Jack Reed (D-RI) opened the hearing with remarks on the function of securitization, noting its usefulness as a tool to help lenders make more loans for consumers and small businesses. Ranking Member Jim Bunning (R-KY) expressed hope that the testimony would provide a better understanding of the securitization market and of what should and can be done to make it work better. He further discussed the balance between the vast capital that securitization can bring to the capital markets and the disaster that can result if not done properly. He questioned whether the problems that could result from securitization markets are a result of bad theory or merely bad execution.
Professor McCoy emphasized to the need to put private-label securitization on sound footing. Noting specifically that securitization creates an environment where there is little incentive for sound underwriting, she argued that the “race to the bottom” for underwriting standards is the root cause of the crisis in investor confidence that seized liquidity markets last year. She argued that the only way to “fix” securitization was to impose stronger standards for underwriting at the federal regulatory level.
Mr. Miller noted that securitizations play an essential role in the U.S. and global economy. With over $12 trillion in outstanding securitization issuances, restoring greater functioning and confidence in the market is a particular urgent need today. In his view, government intervention is necessary to restore investor confidence, as evidenced by the success of the Term Asset-Backed Loan Funding (TALF), not only directly but also the ancillary success for non-TALF, prime asset classes as a result of TALF.
Mr. Davidson argued that the two primary reasons for the continuing stall in the securitization markets were poor underwriting, which has eroded investor confidence, and the complexity of certain security instruments, such as collateralized debt obligations. He said that for investor confidence in the markets to rebound, investors must realize that they need to wield the right tools. Investors must fully understand all of the risks of the particular securitization and ascertain whether those risks fall within acceptable bounds. They must not rely solely on ratings; rather they should use their own quantitative methods to analyze the securities. Finally, he argued for standardized underwriting, arguing that such a system would yield greater transparency of information.
Mr. Hoeffel, speaking on behalf of the commercial mortgage-backed securities industry argued that imposing a standard set of rules or requirements for underwriting would create more problems than it would solve, given how different asset classes are form one another. Rather, he argued that each asset class should be judged independently from others, and the facts and circumstances surrounding each asset class should dictate what new restrictions are required.
Finally, Mr. Irving emphasized the benefits of securitization as a source of funding for business operations, and argued that four actions would help the securitization market’s recovery: (1) increase transparency prior to each deal’s pricing, (2) strengthen credit underwriting for underlying assets, (3) facilitate greater transparency regarding the methodology for the ratings on each deal, and (4) establish more uniform capital structures (assuming the investors would suffice with more uniform structures).
The members of the Subcommittee asked a variety of questions regarding the factors inhibiting recovery and the scope of government intervention to ensure such recovery. Each witness agreed that the primary problem with the securitization market is a lack of investor trust. In addition, several witnesses indicated that greater government intervention would be appropriate and helpful, many noting the benefits of TALF. Some witnesses disagreed about the scope of intervention and whether corrections should be led by the industry or by regulators, or whether congressional action was needed to ensure strong underwriting standards and transparency requirements. In addition, some witnesses actively criticized the role of the Federal Reserve in the securitization crisis – noting that the Federal Reserve had rarely exercised the authority over mortgage lenders that Congress had granted it over fifteen years ago.