Securitization group worried by FDIC proposal

NEW YORK Mon Feb 22, 2010 12:43pm EST

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NEW YORK Feb 22 (Reuters) - A proposal by the Federal Deposit Insurance Corp. to change rules designed to offer assurances to investors in securitized assets threatens to undermine the securitization market and choke off an important source of credit, a trade group said.

The American Securitization Forum expressed its concerns in a letter to the FDIC on Monday.

"We appreciate the FDIC's ongoing support for sustainable securitization but we are concerned that their proposals would greatly inhibit the restart of these critical markets," said Tom Deutsch, executive director of the ASF.

The FDIC is proposing to revise what is known as the safe harbor rule to include numerous preconditions, including requirements relating to a transaction's capital structure, disclosure, documentation, origination and compensation, the ASF said.

The safe harbor was originally created so that investors could look to securitized assets for payment without concern that the assets would be interfered with by the FDIC in the event of a bank failure.

The proposed safe harbor would not only affect investors but could fundamentally change the economics of securitization for sponsors and potentially lead to the elimination of securitization in some sectors, the ASF said in release.

"Under the FDIC's proposals, investors will bear the burden of the loss of the safe harbor if any of the securitization preconditions are not satisfied by the sponsor," said Ralph Daloisio, chairman of the ASF board of directors and managing director at Natixis.

"As an investor, it is imperative that I be able to determine whether the safe harbor will apply so that risks can be appropriately assessed and a transaction can be efficiently priced," said Daloisio.

In a securitization, lenders are able to remove debt such as auto loans, credit cards, student loans, residential and commercial mortgages, from their balance sheets, package them into securities and sell them to investors. This allows lenders to make new loans and keep credit flowing.

If the aggregate burden is too great, the proposals could prevent U.S. insured depository institutions from re-engaging in the securitization markets and force them to rely solely on deposits or other sources of funding, which would seriously harm the availability of credit for consumers and small businesses, the ASF said.

The ASF is proposing that the applicability of the safe harbor not be conditioned upon the numerous requirements included in the FDIC's Advance Notice of Proposed Rulemaking and instead limit any requirements to clear conditions that allow investors to rely upon the safe harbor without fear that its benefits could disappear. (Reporting by Nancy Leinfuss; Editing by Leslie Adler)

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