GLOBAL JOINT INITIATIVE TO RESTORE CONFIDENCE IN THE SECURITIZATION MARKETS ISSUES REPORT
On December 3, 2008, the Global Joint Initiative to Restore Confidence in the Securitization Markets (“Global Joint Initiative”) issued a report identifying the factors contributing to the current market crisis, identified priorities for action by the securitization industry, and issued recommendations for restoring confidence in the securitization markets. The Global Joint Initiative’s participants included the Securities Industry and Financial Markets Association (SIFMA), the American Securitization Forum (ASF), the European Securitization Forum (ESF) and the Australian Securitization Forum (AuSF). The report was based on in-depth interviews with over 100 issues, investors, dealers, servicers and credit rating agencies, as well as an online survey of SIFMA, ASF, ESF and AuSF members who were active market participants. While focusing on residential mortgage securitization, the initiative has relevance for other asset classes.
The Global Joint Initiative’s report stressed the importance of reestablishing confidence in securitization as an essential and long-standing mechanism used by financial institutions for providing capital and liquidity required to finance worldwide demand for consumer and business credit. The report also pointed out multiple factors which contributed to the current crisis and left the market particularly vulnerable to misstep, including (i) deteriorating loan underwriting standards that undermined underlying asset quality, (ii) the market’s extensive reliance on ratings that proved to be overly optimistic, (iii) complex and highly leveraged positions that created a precarious market position, (iv) dealers and investors misjudging liquidity risk, (v) lack of a sense of shared responsibility for the integrity of the system as a whole and (vi) rising losses in the United States subprime market that triggered a crisis in confidence.
Although the Global Joint Initiative recognized that no single action or combination of actions by the industry is likely to be sufficient to return the securitization market to a normal level, the Global Joint Initiative made four recommendations for immediate industry action:
- Improve disclosure of information on underlying assets for residential mortgage backed securities;
- Enhance transparency with regard to underwriting and origination practices;
- Restore the credibility of credit reporting agencies; and
- Improve confidence in valuations, methodologies and assumptions.
The report also put forth eight other recommendations, which represent “the early stages of a practical, global industry action to restore confidence in the market practices and proactively guard against future systemic shocks.” These recommendations include:
- Increasing and enhancing initial and on-going pool information on residential mortgage backed securities into a more easily accessible and more standardized format;
- Establishing core industry-wide market standards of due diligence disclosure and quality assurance practices for residential mortgage backed securities;
- Strengthening and standardizing the representations and warranties as well as repurchase procedures for residential mortgage backed securities;
- Developing industry-wide standard norms for residential mortgage backed securities servicing duties and evaluating servicer performance;
- Expanding and improving independent, third-party sources of valuations and improving the valuation infrastructure and contribution process for specified types of securitization and structured products;
- Restoring market confidence in credit rating agencies by enhancing transparency in the credit rating agency process;
- Establishing a Global Securitization Markets group to report publicly on the state of the market and changes in market practices; and
- Establishing and enhancing educational programs aimed at directors and executives with oversight over securitized and structured credit groups, as well as at investors with significant exposure to these products.
The report opined that greater disclosure, by itself, would not have prevented the current crisis and that the extent and the severity of the current problems are beyond what anyone had forecast. The Global Joint Initiative also stated that the speed and eventual form in which securitization returns will depend on several factors beyond the ability of the industry to affect, including global market conditions, market volatility, and asset prices, delinquencies, defaults and foreclosures.
- Mike Tomkies