Volume 4 Issue 1 Winter / Spring 2010

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Volume 4Issue 1Winter / Spring 2010

INTRODUCTION FROM THECHAIRMANthefromIntroductionRalph DaloisioChairman of the BoardAmerican Securitization ForumChairmanConsider a world where bank lending replaces securitization. Immediately, U.S. banks would have totake on some 12 trillion of outstanding securitized assets, almost doubling their combined balancesheets from 13 trillion to 25 trillion. Regulators would require the banks to raise another 1.2 trillion of equity capital, nearly twice the amount of the TARP bailout, to support the additional assets — more,if regulators stipulated a lower leverage ratio than 10 to one.But equity capital is more expensive than debt capital because it’s less available and returns are more uncertain. So banks would have to pay progressively more for each dollar of equity capital raised.They would then have to charge more for their loans to produce the returns required by their shareholders, making credit unaffordable to many Americans. With consumer spending accounting for two thirds ofour nation’s GDP, less cash would flow from consumers into the real economy.The banks’ huge demand for additional equity capital would crowd out otherswho need it, dampening economic and job growth. In the end, banks would consume more equity capital, produce less credit and the economy would grow moreslowly or even shrink.Not only does securitization allow borrowers to pay less, it enables investorsto earn more. Securitization allows the fireman’s retirement fund to own the policeman’s mortgage, and vice versa. The fireman earns more on his money whilethe policeman pays less for his. If this process were taken through the banks,they would have to take a margin from both to feed their equity investors. Allin, it would work out to be more expensive than the two percentage points or soit costs to arrange a securitization. This same relationship holds true across allconsumer credit types. Though created by Wall Street, securitization links MainStreet to Main Street. It is essentially the democratization of credit.That allows investors and borrowers to participate in the same pool of capitalon their own terms. Since borrowers’ combined activity in repaying their loansgenerates more available cash than any single borrower’s repayment behavior,financial engineers can fashion the pooled cash into investments that look and behave differently from the loansbacking the investments. What emerges is a market clearing mechanism that maximizes choice and minimizescost for the borrower while also maximizing both choice and return for the investor. There is simply no otherway banks can match their assets and liabilities as efficiently as securitization can.That’s why securitization served the country so well for a quarter century before the crisis. The crashdoesn’t suddenly mean it is an inherently flawed model; rather its faults stem from the speculative and self-defeating excesses that grew upon it. The American Securitization Forum, lawmakers, policymakers and regulators are working hard to remove these excesses, to assure the causes and effects of our financial crisis are notrepeatable. However, we have reached a fork in the road. One path lets us harness the power of securitizationand discover America’s full economic potential. The other takes us back to a more conventional, costly and inhibiting deposit-based banking system. Of course, untapped potential is hard to measure, so the consequencesof a wrong decision are not always easy to discern. That increases the chance of making a poor choice. It’s important to be aware of this as we construct our future financial system.

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American Securitization ForumBoard of Directors, 2009-2010Editor: Antony CurrieEmail: acurrie@mpacpublishing.comJournal design: Carolina ZallesSub-editors: P.J. Johnson, Julian MarshallProduction director: Carolina ZallesProduction and artwork: Clare BrewPhotography: Viola YesiltacCrossword: Chris Scarafile and Dan MarcellusWritersNeil O’HaraSteven AbrahamsMark Selick and Andrew Burke- Blake, Cassels & Graydon LLPBill Berliner - Berliner ConsultingMatthew Tomiak - 12th Street CapitalPublisher: Matthew PerksTel: 845 440 7800Email: mperks@mpacpublishing.comVolume 4 - Issue 1Ralph C. Daloisio, ChairJason H.P. Kravitt, Deputy ChairDiane Citron, SecretarySanjeev Handa, Executive Vice PresidentG. Whitfield McDowell, Executive Vice PresidentGregg Silver, Executive Vice PresidentGreg Medcraft, Chairman EmeritusVernon H.C. Wright, Chairman EmeritusJames AhernPeter BrigerDaniel CastroPaul ColonnaJason D’AngeloJohn DareMichael L. DawsonSean DobsonStephen EtheringtonPatricia EvansOrlando FigueroaLisa Filomia-AktasEdward E. GainorTricia HazelwoodMark HeleenReginald ImamuraJohn IsbrandtsenDavid P. JacobRichard JohnsScott KrohnKristi LeoRonald MassMichael MilletteMichael MitchellDouglas MurrayJon NomuraLawrence D. RubensteinMani SabapathiJordan SchwartzCharles ScullyFrank SerravalliSusan B. SheffieldMark StancherMichael SternbergGregory D. WalkerNatixisMayer Brown LLPCarrington Capital ManagementTIAA-CREFBank of America Securities LLC1st Financial Funding & Investment CorporationAustralian Securities and Investments CommissionVernon H.C. WrightSociété Générale Corporate & Investment BankingFortress Investment Group LLCHuxley Capital Management LLCGE Asset Management IncorporatedAIG InvestmentsMBIAFreddie MacAmherst Securities Group LPDiscover Financial ServicesWilmington Trust CompanyLord Securities CorporationErnst & Young LLPBingham McCutchen LLPCredit SuisseSallie MaePNC Capital Markets LLCRedwood TrustStandard & Poor’sCapital OneFord Motor Credit CompanyDeutsche BankWestern Asset Management CompanyGoldman, Sachs & Co.Orrick, Herrington & Sutcliffe LLPFitch RatingsAmerican Honda Finance CorporationWells Fargo Asset Securities CorporationPrudential Investment Management Inc.Cadwalader, Wickersham & Taft LLPMetLifePricewaterhouseCoopers LLPAmeriCreditJPMorgan Asset ManagementMorgan StanleyUBSASF Professional Staff ContactsTom Deutsch, Acting Executive DirectorTel: 212.313.1135Email: tdeutsch@americansecuritization.comMembers of the Editorial Advisory BoardGloria AviottiAlexander BatchvarovDaniel CastroMoorad ChoudhryDiane CitronCameron L. CowanRalph DaloisioTom DeutschJoseph M. DonovanRon D’VariChristopher T. FlanaganSanjeev HandaJason H.P. KravittGreg MedcraftThomas E. PlankMarty RosenblattMichelle L. Russell-DoweProfessor Steven SchwarczVernon H.C. WrightFitch SolutionsMerrill Lynch InternationalHuxley Capital Management LLCEurope Arab Bank PLCCarrington Capital ManagementOrrick, Herrington & Sutcliffe LLPNatixisAmerican Securitization ForumCohen & CompanyNewOak CapitalJPMorgan Securities Inc.TIAA-CREFMayer Brown LLPAustralian Securities and Investments CommissionUniversity Tennessee College of Law/Bingham McCutchen LLPDeloitte & Touche LLPHyperion Brookfield Asset Management, Inc.Duke University School of Law/Duke Global Capital Markets CenterVernon H.C. WrightTere Petersen, Associate Director, Events and MarketingTel: 212.313.1136Email: tpetersen@americansecuritization.comChris Killian, Associate Director, AdvocacyTel: 212.313.1126Email: ckillian@americansecuritization.comEvan Siegert, Associate Director, AdvocacyTel: 212.313.1178Email: esiegert@americansecuritization.comJustin Ross, Senior AnalystTel: 212.313.1138Email: jross@americansecuritization.comCaitlin Wood, AnalystTel: 212.313.1137Email: cwood@americansecuritization.comFor information on ASF membership, contact:Janet Brathwaite, Executive AssistantTel: 212.313.1134Email: jbrathwaite@americansecuritization.comAmerican Securitization is published twice a year by the American Securitization Forum in partnership withMPAC Publishing. Periodicals postage paid at Easton, PA Postmaster: Send address changes to:Ida Cece at icece@americansecuritization.comCopyright American Securitization Forum 2010. All rights reserved.Materials contained herein may not be reproduced for general distribution, advertising or promotional purposes without theexpress consent of ASF. The statements of fact and opinion in signed articles are the sole responsibility of the authors, and do notnecessarily reflect the positions of the officers, members, or staff of ASF, nor the employers of the authors.The American Securitization Forum (ASF) is a broadly based, not-for-profit professional forum through which participants inthe U.S. securitization market can advocate their common interests on important legal, regulatory and market practice issues.ASF also provides substantive and timely informational and educational programs of value to securitization market professionals, including major industry conferences and topical, issue-specific workshops and seminars. ASF is an adjunct forum of theSecurities Industry and Financial Markets Association.

EDITORIALIt is always tempting for lawmakers and regulators to be seen taking a hard line on whatever can beblamed for causing a crisis. And what better way to do that this time round than to restrict the abilityof securitization to contribute to a crash?On the face of it, there’s no harm in that. After all, it’s a goal shared by the American SecuritizationForum and its members. In response to the crisis, ASF has undertaken a number of measures in the pasttwo years to improve industry practices: witness the ASF Loan Identification Number Code, known asASF LINC, a joint-venture initiative with Standard & Poor’s Fixed Income Risk Management Servicesannounced last September to provide detailed data on the underlying loans in asset-backed securities. Infact ASF’s commitment to market transparency stretches back before the credit crisis to when the forumplayed an integral role in shaping RegAB.But a number of the actions Washington either has already put in place or is considering risk taking reforms too far. The plan to enforce issuers and other players in the securitization chain to retain 5%of the risk of each deal they sell, for example, might sound like common sense to many; even a fifth of ASFmembers reckon it has merit, according to an exclusive poll conducted by American Securitization (see page32). In practice, though, constructing rules nuanced enough to work for the variety of asset classes securitization deals with is a complex affair. So much so, in fact, that one of our guest authors, Steve Abrahams,who is also sympathetic to the idea, argues that disclosing what risks are retained would work better thanmandatory quotas.What really has the industry up in arms, though, is themove by regulators to link risk-based capital requirements tothe infamous FAS 166 and 167 accounting changes whichcame into force at the end of 2009. Even the head of the Financial Accounting Standards Board has said the latter should notinfluence the former. Yet that is what is happening, even though,as the panelists in our roundtable explain, the consequences willbe either less credit available to consumers or interest-rate hikesof as much as three percentage points on loans (see page 34).That is why American Securitization is taking the unusualstep of not just explaining the benefits of securitization, givingour take on what caused the crisis or admitting where the industry erred, as we have done in the past. We’re using this edition togo on the offensive, to argue why some of these measures underconsideration in Washington to rein in securitization could endup doing more harm to the economy than good.EditorialAntony CurrieEditorAmerican Securitization

Update from theDuring another tough year for the economy and the markets, the American Securitization Forum has underscored its role as a vital organization for the health of the industry. With the close collaboration of our members, ASF continues to undertake crucial initiatives that affect our collective livelihood and enable us to meetthe challenges of the current environment.As we continue to work together to achieve our industry’s shared objectives, our core values and goals remain unchanged:Consensus: To build consensus within the U.S. securitization industry on issues of broad importance to the industry;Advocacy: To mount principled and focused efforts to advance ASF’s substantive positions, chiefly by interactingwith appropriate governmental, regulatory, accounting, legislative and other policy-making bodies; andEducation: To inform and educate not only the securitization community and related constituencies but also the publicat large, and to sponsor substantive, high quality conferences and educational programs.UpdatefromtheASFASF Update During the summer we successfullycompleted our scheduled annual changesto member leadership, following a ballotin June to elect new board members aswell as committee and subforum leaders.Approximately one third of ASF leadership positions are rotated annually tohelp ensure that all ASF constituenciesand participants are represented.As our activities are run by and forthe securitization industry, member participation in advocacy and educationalinitiatives is crucial to ASF’s accomplishments. More than 8,000 individuals from member firms are involved withASF in some capacity, and more than aquarter — some 2,100 — regularly participate in ASF committees, subforums,task forces and working groups. ASFconducts a variety of weekly meetingsand conference calls on a wide range oftopics, providing an exceptional numberof opportunities for planning, communication and consensus building. NewASF has approximately 350 memberfirms representing nearly all constituencies within the securitization market.We have more than 90 investors, 60issuers, 55 financial intermediaries, 50law firms, 30 information and technology vendors and 20 servicers, along withnumerous other types of firms. We alsohave several individual members in anew category created in 2008 for formersecuritization market participants nolonger affiliated with a firm.Legislative AdvocacyThroughout the past several years,ASF has maintained a commitment tocommunicate clearly and effectively withfederal and state legislators. ASF hassuccessfully developed collaborative relationships with several legislative representatives and their staffs, ensuring thatthe voice of the industry is heard.ASF is frequently consulted on developments and upcoming proposalsthat affect securitization. Throughoutthe past several months, ASF has testified before Congress, submitted writtenfeedback and met with representativeson issues pertaining to securitizationincluding mortgage finance reform, lossmitigation and foreclosure prevention,credit risk retention, mortgage servicingand developments in consumer ABS.In October, ASF testified before theSenate Banking, Housing and Urban Affairs Subcommittee on Securities, Insurance and Investment in a hearing entitledSecuritization of Assets: Problems and Solutions. Our testimony focused primarilyon the role and importance of securitization to the financial system and economy;current securitization market conditions;limitations and deficiencies in securitization revealed by the financial marketcrisis; and views and recommendations oncertain policy and market reform initiatives.In November, we submitted a numberof proposed revisions to the bill entitledCredit Risk Retention Act of 2009 to theHouse Financial Services Committee.This bill includes language regarding asset-backed securities risk retention, suspensions of reporting, loan level reporting and representations and warranties.ASF’s markup, which is based on previously established ASF positions on thesetopics, was produced after broad-basedmember feedback.ASF hosted two Sunset Seminars inthe fall to provide information and updates on current legislative developments.Securitization Policy Reforms — A Primeron Current Legislative and Regulatory Proposals was held in October in Charlotte,and Securitization Legislative Reforms:The State of Play was held in Novemberin New York.Legal and Regulatory AdvocacyOur dialogue with federal regulatoryagencies has continued throughout theyear, as government agencies continue torespond to the current economic conditions. We frequently interact, both inperson and via written comments and responses, with the Treasury Department,the SEC, the Federal Reserve Board andFederal Reserve Banks, the Office of theComptroller of the Currency, the Officeof Thrift Supervision, the Federal Housing Finance Agency and many others.We held dozens of face-to-face meet-

ASFthefromUpdate ings with regulatory agencies throughoutthe fall on a broad spectrum of issuesincluding the Home Affordable Modification Program (HAMP), principal forbearance, the Second Lien ModificationProgram, Basel II and additional forthcoming regulations.In September, we submitted a letterto federal banking regulators requestingthe near-term announcement of a sixmonth moratorium on any regulatorycapital rule changes related to the implementation of accounting standards FAS166 and 167, andthe proposed elimination of the optionfor ABCP conduitsponsors to disregardconsolidation of conduits for risk basedcapital purposes, asproposed in the regulators’ Septembernotice of proposedrulemaking.ASFfollowed up this letter with meetingswith the regulators throughout the fall,as well as additional letters submitted inOctober to regulators and Senate representatives.In August, ASF submitted a proposalto the FDIC to amend its 2000 rule onlegal isolation to account for the changesmade by FASB in FAS 166. This letterwas followed by a meeting between ASFand the FDIC in September. In Augustand September, ASF also sent requests tothe FDIC to modify its true sale rules forbank-originated securitizations.In September, ASF submitted a letter to the IRS and the Treasury notingASF member concerns with the IncomeTax Regulations issued on September 16,2009 under Sections 860A and 860G ofthe Internal Revenue Code of 1986, asamended. The letter indicates concernover a potentially serious consequence ofone of the new provisions regarding thealternative test for releases of real property collateral that could cause breaches byREMICs of existing loan agreements orimpede the successful resolution of defaulted loans. Additionally, ASF met withthe IRS in October and submitted an additional letter as a result of that meeting.We responded to the SEC’s requestfor comments regarding its Extensionof Filing Accommodation for Static PoolInformation in Filings With Respect toAsset-Backed Securities (Release No. 339074). Our comments were consistentwith those contained in an August letterin which ASF requested that Rule 312of Regulation S-T be amended either tomake permanent or to extend the filingaccommodation for static pool information.In November, we submitted a letterregarding FINRA’s proposal to expandits TRACE reporting requirements toABS. The letter focuses on a numberof the most significant technical issuesrelated to the implementation of thisproposal and generally supports the approach FINRA is taking with respect tothis issue.ASF submitted a letter to HUD andGinnie Mae in October urging GinnieMae not to remove features of its securities that provide important protectionsto their investors and directing the agency to consider utilizing existing marketmodels to handle prepayment interestshortfalls. ASF representatives followedup on the letter with a productive meeting with staff from HUD, Ginnie Maeand the FHA.ASF submitted a comment letter inresponse to the SEC’s money marketfund reform proposals in September. Theletter expresses concerns that additionalmoney market mutual fund regulationmay restrict bank liquidity which couldbe particularly harmful in the currentperiod of capital markets dislocation asit would negatively impact access tocredit by consumers and businesses.The submission followed an Augustmeeting between ASF and the SEC todiscuss ASF’s preliminary views on theproposals.Throughout thesummer and fall, ASFcommunicated withthe International Organization of Securities Commissions(IOSCO) on severalissues. ASF commented on a consultationreport entitled Transparency of StructuredFinance Products inNovember, a consultation paper entitledDisclosure Principles for Public Offeringsand Listings of Asset-Backed Securities inAugust and a consultation report on unregulated markets and products in June.Additionally, ASF staff and membersparticipated in a consultation meeting ofthe IOSCO Task Force on UnregulatedMarkets and Products Industry Consultation during the summer.ASF also monitors developments inlocal governments and submitted a letterin August to the New York City Council describing the potential impact thatchanges to the New York City Code’sdefinition of “debt collection agency” thatbecame effective in July could have on thesecondary market. ASF staff met withNew York City Council members prior tosubmitting the letter to discuss proposedlegislation to correct the definitions.ASF Project RESTARTASF continued its work on ASF’s

ASF 2010 will once again be the premier securitization event of the year,bringing together thousands of industryparticipants for education and networking. This year the event is in Washington D.C., at the Gaylord National Hotelbetween January 31st and February 3rd.The program covers an extensive array ofsubstantive panels on critical policy challenges confronting the market. Sessionswill feature key regulators, policymakers and thought leaders from the variouspublic sector organizations with whomASF regularly interacts, and whose viewsand actions directly influence and shapethe future of our industry.In the fall we offered two sessions ofthe ASF Securitization Institute on securitization fundamentals and appliedsecuritization. An industry-developededucation and training curriculum covering core securitization market conceptsand topics, the Institute is designed andtaught by distinguished securitizationmarket participants.Our annual meeting was held on June17th at ASF Headquarters in New York.It included an ASF organizational update,a series of concurrent meetings coveringcurrent market issues, related legislationand regulatory initiatives, and a luncheonprogram featuring Hayley Boesky, AdamtheEducation and TrainingAshcraft and Zoltan Pozsar of the Federal Reserve Bank of New York.Sunset Seminars in 2009 focused onASF Project RESTART and financialregulatory reform initiatives, legislativeand regulatory proposals and changes toaccounting standards. All Sunset Seminars are available via webinar both during and after the event, enabling users tolisten to the seminars and view the accompanying materials.In June, ASF released the results of astudy assessing the long-term impact ofsecuritization, with a focus on the residential mortgage-backed securities market. The study analyzed the impact of securitization on the cost and availability ofcredit as well as how securitization affectsmarket liquidity and the distribution ofrisk. Based on an extensive review of loanlevel and other data between 1990 and2006, the study found that securitizationhas produced significant economic benefits. ASF released a companion piece tothe study, which notes several importantperspectives that should be considered inany critical examination of the role, impact and benefits of securitization.ASF issued a discussion paper onprincipal forbearance modifications inJune. It serves to explain the effects ofprincipal forbearance on the cash flows ofthe two most frequently used structuresin the RMBS industry: the shifting interest structure and the overcollateralizationstructure.ASF has continued to disseminate relevant information to ASF members andthe industry via multiple formats. TheASF Weekly Report provides updateson securitization market developmentsas well as ASF advocacy projects andevents. ASF’s website, www.americansecuritization.com is frequently updatedwith news and information. And twicea year we publish our official journal,American Securitization, which offers indepth analysis, commentary and insighton market events.fromtors and credit rating agencies with consistent fields of information across issuers and enable them to efficiently reviewbond performance information.ASF staff and members meet frequently with regulators regarding current and upcoming phases of ASFProject RESTART to ensure thatgovernment officials are updated on industry progress.Federal Reserve GovernorDaniel K. Tarullo referenced ASF Project RESTART in his written testimonyfor the House Financial ServicesCommittee's October hearing entitledSystemic Regulation, Prudential Matters,Resolution Authority and Securitization.UpdateProject on Residential SecuritizationTransparency and Reporting (ASF Project RESTART), an industry-developedinitiative to help rebuild investor confidence in both mortgage- and other assetbacked securities, restore capital flows tothe securitization markets and increasethe availability of affordable credit to allAmericans. In July we released a requestfor comment on proposed ASF ModelRMBS Representations and Warranties,designed to enhance the alignment ofincentives of mortgage originators withthose of investors in mortgage loans. ASFalso released its final Project RESTARTRMBS Disclosure and Reporting Packages in July, which should increase thetransparency of RMBS to investors andcredit ratings agencies. When those itemswere released, ASF held a Sunset Seminar to offer industry views on the impactthat the Obama Administration’s financial regulatory reform proposals couldhave on the securitization industry andhow these proposals relate to recommendations contained in ASF ProjectRESTART.In September, ASF and Standard &Poor’s Fixed Income Risk ManagementServices launched the new standardized global code for identifying criticalinformation about individual loans thatare securitized in the mortgage- and asset-backed securities markets. This newglobal ASF Loan Identification NumberCode (ASF LINC ) is a 16-digit identification code that captures underlyingloan type, origination date and country oforigin, in addition to randomized alphanumeric data, to create a unique ID for awide range of loans that may be pooledand sold into the capital markets.Another phase of ASF Project RESTART, the ASF Project RESTARTRMBS Trustee Bond-Level Reporting Package request for comment, wasreleased in November. The proposedreporting package consists of a standardized layout containing 28 fields ofbond-level information. Standardizationof trustee reports would provide inves-ASFUpdate from the

By Steven AbrahamsThere is widespread pressure for those involvedin mortgage securitization to retain a portion ofthe risk in order to keep their interests in line withinvestors and thus reduce poor lending decisions.Retaining risk sounds straightforward in principlebut is complex in practice.riskWeighing uptheRiskRetentionA10nalysts and politicians on both sides of the Atlantic inthe past 12 months have called for all the key players inthe home loan securitization process to hold on to someof the risk. Forcing the various participants to invest in their owncooking, the argument goes, will align their interests with the endinvestors and help breathe life back into the market for privatelabel mortgage securitization.Under the right circumstances, the argument is, this wouldhelp ensure reliable credit in the underlying loans. But in practice,the complexity of using mandatory retained risk to align interestsargues for a more efficient approach: discl

Ron D’Vari Christopher T. Flanagan Sanjeev Handa Jason H.P. Kravitt Greg Medcraft Thomas E. Plank Marty Rosenblatt Michelle L. Russell-Dowe Professor Steven Schwarcz Vernon H.C. Wright Fitch Solutions Merrill Lynch International Huxley Capital Management LLC Europe Arab Bank PLC Carrington Capital Management Orrick, Herrington & Sutcliffe LLP .

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