NEW YORK, Jan 7 (IFR) - The US securitization industry on Monday said part of the new banking regulations known as Basel III, allowing securities backed by residential mortgages to satisfy bank liquidity requirements, may be unworkable in the United States.
While initially welcoming the proposed rule, the American Securitization Forum (ASF), the industry's main lobby group, said that many US housing loans ultimately could not qualify for inclusion.
"For this to work, US regulators will have to deviate from the precise proposals of the Basel Committee," ASF executive director Tom Deutsch told IFR.
The committee, made up of top bankers and regulators from across the world, has been crafting new regulations to shore up banks and try to prevent another global financial crisis.
Requiring banks to hold more capital to offset potential losses is one of the key planks of the new Basel rules.
One proposal has been to allow banks to count private label RMBS, derivatives products underpinned by residential mortgages that caused havoc in the crisis when underlying loans went sour, as capital collateral.
The proposed rules already would allow banks to use so-called agency RMBS, securities that carry government backing.
But the committee has said that for RMBS to qualify, the underlying loans would have be full-recourse loans - those which allow lenders to come after borrowers if their houses are sold in distress for less than the amount still owed.
The ASF said that at least a dozen states in the US - including California, the most important state for real-estate securitization - only allow non-recourse loans.
"The rule cannot possibly have this 'recourse' requirement in the US," Deutsch said. "RMBS will not be able to qualify under (this) unless US regulators adapt this to US law."
The industry group at first had hoped that allowing RMBS to be used as part of the liquidity buffer for banks would help start to revive a sector that has seen a sharp downturn since the crisis.
"It would have increased demand for these securities by banks," Deutsch said.
"By increasing overall demand, it would ultimately increase supply down the road and would have been a net positive for private capital to come back into the mortgage market."
In the aftermath of the financial crisis, much of it brought on by sub-prime mortgages used to underpin securities that were then repackaged to investors, more than 90% of US residential mortgages are made via US government agencies such as Fannie Mae .
Only US$6bn of new private mortgage bonds were issued in 2012.
The Basel proposals, which are to be implemented over a number of years, aim among other goals to ensure that banks have sufficient assets in the event of heavy financial stress.
A previous iteration of the rule allowed agency MBS to be used to meet the requirement, technically known as the liquidity coverage ratio or LCR.
Analysts said that it wasn't clear whether so-called agency collateralized mortgage obligations (CMOs) would also be accepted.
But some said that the increased marketability of private MBS might lead to banks reducing their vast holdings of agency MBS.
"Banks now have a broader menu to choose from - a broader competing set of solutions and securities to post in order to satisfy the LCR," said Steven Abrahams, an RMBS analyst at Deutsche Bank.
"This means that there might be less of a need for Basel-compliant institutions to reach for agency MBS."