FinReg mandated that sellers/underwriters of mortgage-backed securities (MBSs) be required to retain 5% of the MBSs on their balance sheets (i.e., “skin in the game”). The 5% credit retention serves as a counterweight to the sellers pushing shoddily underwritten loans into the capital markets — sellers will suffer losses alongside holders of the MBSs if defaults rise (alignment of interests). However, the FDIC has approved an exemption proposal that will allow sellers of mortgages with loan-to-values (LTVs) of at least 80% (i.e., 20% down payment on residential mortgages, aka Qualified Residential Mortgages or QRM) from the 5% rule. Per the … Continue Reading →

The subprime mortgage debacle highlighted the role that credit rating agencies played in subprime lending. Of particular focus was the role of Nationally Recognized Statistical Rating Organizations (NRSROs), an SEC-sanctioned designation. Over time, the capital markets took the SEC designation to mean that an NRSRO had the government’s seal of approval and was somehow better equipped to assess creditworthiness of bond issues than non-NRSRO credit-rating firms. Of the 10 NRSROs, the “Big Three” — Moody’s, S&P, and Fitch — are the best known. During the first five to six years of the second millennium, the Big Three viewed asset-backed and … Continue Reading →

FinReg has drawn a line in the sand. Within that newly enacted law, increased transparency is a centerpiece, in particular as it relates to over-the-counter (OTC) derivatives. As such, “swap execution facilities” (aka “SEFs”) has entered the lexicon of market participants by way of FinReg. SEFs are electronic trading venues that facilitate a request-for-quote (RFQ) process between buyers and sellers. Historically, swaps were private contracts that traded on a bilateral basis between parties. As private contracts, their execution and any information relating to that execution was held strictly by transacting parties only. By this description, swap activity and pricing information … Continue Reading →