June 14, 2019 | Issue 286
Next Week in Washington
What We're Watching
SFIG Look Ahead
SFIG Events
SFIG News
SFIG Meets with FHFA Leadership

On Friday June 7 th , SFIG staff, along with Government Guaranteed Steering Committee Chair Andy Davidson, met with Dr. Mark Calabria and other leaders of the Federal Housing Finance Agency to discuss the views of FHFA, and where SFIG can help inform policy decisions and serve as a resource for initiatives that are currently being contemplated by FHFA and the Administration. SFIG shared views on the QM Patch, the GSEs’ Credit Risk Transfer initiatives, and the role of the FHFA in managing the GSEs while in Conservatorship and maintaining the relative stability that currently exists in the market. SFIG will remain committed in its engagement with FHFA and other regulatory agencies that currently oversee our nation’s housing market. 
SFIG Submits Two Comment Letters to FHA and Ginnie Mae

 SFIG recently responded to requests for input issued by the Federal Housing Administration (FHA) and Ginnie Mae . SFIG’s response to Ginnie Mae comments on the proposed changes to the Pooling and Eligibility Changes for the Ginnie II Multi-Issuer Program. The letter notes that SFIG supports Ginnie Mae’s proposal to exclude or restrict VA cash-out refinances in excess of 90% loan-to-value, and requests that such changes be undertaken in a way so as not to disrupt loans currently in the pipeline. Moreover, SFIG recommends that any excluded loans be pooled in such a way that maximizes their liquidity while still allowing for consistent prepayment speed modeling in Ginnie II pools. SFIG also recommends that Ginnie Mae continue their work with other regulators to ensure that VA borrowers’ access to credit is not unduly restrained, and that VA borrowers are not targeted with deceptive or misleading offers.
 
SFIG’s response to FHA comments on proposed changes to the FHA certification process and to the Defect Taxonomy. While SFIG believes these changes are steps in the right direction to encourage a wider base of FHA lenders, concerns remain that they do not go far enough to bring back the diversity of bank and non-bank lenders that have traditionally operated in that space. The absence of a variety of lenders risks decreased optionality for substantive housing finance reform, and could potentially limit Ginnie Mae’s ability to ensure investors are protected through its counterparty risk framework. SFIG applauds the work that has been done, and encourages the FHA to continue this important initiative.

For additional information on the two letters, please contact Dallin Merrill at [email protected]
Next Week in Washington
Senate Committee on Banking, Housing and Urban Affairs Hearings
All hearings and markups will take place in Dirksen Senate Office Building 538 and are broadcast live .

Tuesday, June 18
10:00 AM EST
  • Full Committee hearing: “The Reauthorization of the Terrorism Risk Insurance Program.”
 
Thursday, June 20
10:00 AM EST
  • Full Committee hearing: “Outside Perspectives on the Collection of Beneficial Ownership Information.” 

House Committee on Financial Services Hearings and Markups
All hearings and markups will take place in Rayburn House Office Building 2128 and are broadcast live .
 
Wednesday, June 19
10:00 AM EST
·      Subcommittee on National Security, International Development and Monetary Policy hearing: “Slowing Economic Growth: The Impact of Recent Trade and Tax Policies on the U.S. Economy.”
 
Wednesday, June 19
2:00 PM EST
·      Subcommittee on Investor Protection, Entrepreneurship and Capital Markets hearing: “Putting Investors First: Examining Proposals to Strengthen Enforcement Against Securities Law Violators.”
 
Thursday, June 20
10:00 AM EST
·      Full Committee hearing: “Diversity in the Boardroom: Examining Proposals to Increase the Diversity of America’s Boards.”
 
Thursday, June 20
2:00 PM EST
·      Subcommittee on Housing, Community Development and Insurance hearing: “What’s Your Home Worth? A Review of the Appraisal Industry.”
What We're Watching
Ford Issues LIBOR Deal with ARRC/SFIG Fallback Language

On June 13, Ford Credit began marketing an approximately $1 billion issuance out of its Ford Credit Auto Owner Trust (Trust), with a floating rate tranche linked to LIBOR and incorporating the trigger and replacement fallback language recommended by the Alternative Reference Rates Committee (ARRC). This is probably the first securitization deal to include the ARRC language and may serve as a blueprint of sorts for other ABS issuers. A few key refinements from the ARRC language are as follows:
 
  • The ARRC recommended fallback language makes use of the concept of a Designated Transaction Representative (DTR) in order to provide flexibility among transactions as to the party responsible for certain duties related to LIBOR transition. It was determined that only the Trust would be able to perform the functions of a DTR and was, therefore, hardwired into the relevant mechanics as the entity responsible for these duties.
  • The ARRC’s recommended fallback language includes in the definition of a “Benchmark Replacement Date” the ability to initiate a Benchmark Transition Event up to 60 days early. However, the Trust did not make use of this provision. 
  • The ARRC’s recommendations allow issuers to select from several methods of compounding or averaging SOFR as a replacement benchmark rate in the absence of a forward-looking term curve; i.e., the second step in the fallback rate waterfall. The Trust chose the compounded SOFR in arrears methodology (with a five business day suspension period) as this second step. Given the lengthy discussions the securitization industry had on fallback rates, the Trust’s decision to go with compounding in arrears, which is considered operationally difficult but more accurate from an economic perspective, will certainly be noted.
  • The Trust did not use the ARRC’s fourth fallback rate, which is an ISDA-determined rate. Rather, it skipped to the last fallback step where the Trust makes the decision regarding replacement rate and spread.
  • If the initial benchmark replacement is any rate other than term SOFR and the trust later determines that term SOFR can be determined, term SOFR will become the new unadjusted benchmark replacement and will, together with a new benchmark replacement adjustment for term SOFR, replace the then-current benchmark on the next benchmark determination date for term SOFR. The ARRC language limits this retesting to the second step in the fallback rate waterfall.
 
Ford participated actively in SFIG’s LIBOR efforts and ARRC’s Securitization Working Group, which worked extensively over the past year to develop this fallback language. The industry is expected to closely watch the execution of this landmark deal.
Mnuchin Pushes Back on Recap and Release for housing GSEs

In a recent interview, Treasury Secretary Mnuchin pushed back on efforts to release Fannie and Freddie from conservatorship through the “recap and release” process. Speaking at the G20 Finance Ministers conference in Japan, Secretary Mnuchin noted that he would prefer an explicit government backstop of Fannie and Freddie securities. Industry experts note that while this approach could make debt very safe in the minds of bond investors, it could make it harder to reform Fannie and Freddie because this change would require Congressional approval rather than administrative change. Federal Housing Finance Agency Director Mark Calabria has previously indicated that such a guarantee is not a prerequisite for the GSEs to be released from conservatorship.
GOP Lawmakers Worried About Rewrite of Bank Rules

Several Republican members of Congress are becoming increasingly concerned that their window of opportunity towards rolling back several post-crisis financial rules is shrinking. There is a growing concern that if Democrats win pivotal elections in the next two years, there will be severe limitations on what financial regulations get rolled back. Sen. Jerry Moran (R-KS) and Sen. Mike Rounds (R-SD) indicated that their overall goal was to finalize as many rule changes as much as possible before 2020. Some of the rules that are pending include dividing the big U.S banks into four categories based on their asset size and other risk factors, easing Federal Reserve stress test requirements, and changing how often a big bank needs to have submitted a “living will.” 
FCA Indicates Sonia Derivatives Have Enough Liquidity for Term Rate

The UK’s Financial Conduct Authority (FCA) recently announced that there is enough liquidity in Sonia-linked derivatives to construct a forward-looking rate. Sonia liquidity has slowly, but steadily, been increasing with total Sonia swaps reaching $2.8 trillion year-to-date by the end of May. While Sonia liquidity is growing, FCA Chief Executive Andrew Bailey noted that this forward-looking rate should only be used in a subset of the market stating, “there are some parts of the market where we need it and that actually there are some parts of the market where it’s not necessary and it would be better to rely on the foundations of what’s there.” Bailey also added that the FCA is developing criteria for when LIBOR is no longer representative of an underlying market and is developing mechanisms that would trigger fallback mechanisms if this were the case. 
Wall Street Investors Expecting Fed Rate Cut Soon

With the US economy showing signs of slowing down, Wall Street investors are beginning to ask when, not if, the Federal Reserve (the Fed) will cut interest rates. However, Fed Chairman Jerome Powell has not made it entirely clear if he will follow through with rate cuts. Last month, Chairman Powell and other Fed officials agreed that interest rates would remain largely untouched throughout the rest of the year, however, last week Chairman Powell indicated that he would be willing to take measures if Trump’s trade battles began to severely impact the US economy. The next Federal Reserve meeting is June 18-19, 2019. 
EBA: EU Securitization Final Rules Due by Year-End

Christian Moor, Principal Policy Officer at the EBA, expects that a series of rules critical to understanding new EU securitization requirements will be adopted by the European Commission (EC) in July and finalized by the end of the year, according to Risk.Net .
“The good news is that by July you will see all of the big missing pieces,” said Mr. Moor at Global ABS on June 11. “The bad news is that it is still not actual legislation. It will be adopted by the EC and it will be public for all of you but only when the Council of the EU and European Parliament adopt it and it is published in the official journal will it become law... The expectation is that will happen in November or December.”

Regulators have also begun discussions on the topic of whether article five of the new regulation requires institutional investors to verify if securitizations from issuers outside the EU comply with the disclosure rules set out in article seven. “We have [already] had a first meeting [on disclosure requirements for non-EU deals] and then in September and November we will have a few more meetings,” Moor said. “Hopefully at the end of the year we will clarify the scope of application of the securitization regulation.”

SFIG has engaged its members and will continue to keep our membership updated via our EU Securitization Regulation Task Force. Please contact Hunter Hamrick if you’d like to join.
SFIG Look Ahead
SFIG Legal Counsel Monthly Call
Monday, June 17
11:00 a.m - 12:00 p.m EDT

SFIG TRID Grid Working Group
Wednesday, June 19
11:30 a.m - 12:30 p.m EDT
SFIG LIBOR Task Force Call
Wednesday, June 19
4:00 p.m - 5:00 p.m EDT

SFIG ERISA Task Force Biweekly Call
Thursday, June 20
3:00 p.m - 4:00 p.m EDT
SFIG Events
Don't miss out on the Structured Finance Industry Group's ("SFIG's") WiS Week 2019 , August 5-August 9 , occurring in seven cities across the U.S. This year’s events will feature curated content by Caroline Webb , who will focus on how to use insights from behavioral science to handle stressful uncertainty, solve difficult problems, deal with challenging people, and, ultimately, see more of what matters. Attendees will also be provided ample time to network at each session.
  
Sponsorship Opportunities
Now Available
SFIG Residential Mortgage Finance Symposium

The Structured Finance Industry Group’s 2019 Residential Mortgage Finance Symposium will once again be held at the Conrad New York, November 4-5, 2019. The Symposium will include top industry speakers, market-driven content, and a diverse array of industry engagement opportunities.