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
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
"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
"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
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
But some said that the increased marketability of private
MBS might lead to banks reducing their vast holdings of agency
"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
"This means that there might be less of a need for
Basel-compliant institutions to reach for agency MBS."