SEC Explores Modernizing RMBS Regulations to Boost Housing Affordability

Few would dispute that the United States is currently facing a housing crisis. A combination of factors,  including housing shortages, soaring home prices, the lasting effects of the pandemic, rising property taxes, high interest rates, proposed tariffs, and more, has resulted in what has now become an acute housing crisis. 

Unaffordable housing and the lack of adequate housing supply directly affect the health of the U.S. economy. It affects labor markets and the country’s overall productivity. High housing costs leave consumers with less money to spend and make it harder or impossible for workers to move to areas with better job opportunities. 

The situation appears to be getting worse, and it certainly will not fix itself. Businesses, state, local, and federal governments will all need to work together to develop solutions. Indeed, the severity of the housing crisis has prompted the Securities and Exchange Commission (SEC) to look more closely at the impact its policies may be having on housing prices and the economy. Recognizing the significance that the securitization market has on the U.S. economy, and the effect residential mortgage-backed securities (RMBS) can have on the housing market, SEC Chairman Paul Atkins recently stated his thoughts on the subject this way: 

“Home ownership has long been the cornerstone of the American Dream. Yet, this dream remains out of reach for too many Americans today due, in part, to mortgage costs. A vibrant public market for RMBS can have downstream effects of reducing these costs and benefitting the U.S. housing sector.” 

In an effort to explore how policy and disclosure requirements might be affecting affordable housing, the SEC recently reviewed the current RMBS framework. According to the SEC, the RMBS program, which should have promoted registration in the asset-backed securities (ABS) market, is simply not working. 

As discussed more fully below, to address the inadequate functioning of the RMBS framework, the SEC is now requesting public input on potential reforms to the RMBS program. By making changes that can revitalize RMBS registrations, the SEC hopes to restore transparency, improve public confidence, and promote greater access to affordable homeownership.

The SEC’s Concept Release on Residential Mortgage-Backed Securities Disclosures and Enhancements (RMBS)

On September 26, 2005, the SEC released a “concept release” on its current RMBS framework. 

A concept release is a document that requests public comment on certain issues. Its purpose is to get broad public feedback on the particular issue described in the document before the SEC commits to changing its policies or amending applicable law. 

In this case, the SEC is requesting public comment before amending Regulation AB to do the following:

1. Amend the asset-level disclosure requirements for residential mortgage-backed securities and, 

2. Revise the definition of “asset-backed security.” 

According to the SEC, securities-backed offerings — and residential mortgage-backed securities in particular were targeted as playing a significant role in the 2008 financial crisis. In response to the criticism about the role of RMBS in the crisis, in 2014, the SEC amended Regulation AB (the federal law’s comprehensive asset-backed securities (ABS) law). The changes made included amendments to the asset-level disclosure requirements for asset-backed securities for residential mortgages, car loans and leases, debt securities, and resecuritizations. 

When the current housing crisis prompted the SEC to take another look at the RMBS framework, the SEC found that since the adoption of the Regulation AB amendments in 2014 (often referred to as Regulation AB II), there has not been one single registered RMBS offering. Instead, RMBS securitizations for home loans have been concentrated in offerings from Fannie Mae and Freddie Mac, which are exempt from registration requirements. Meanwhile, asset-backed securities that are backed by car loans or credit cards have an active RMBS registration market. The conclusion the SEC has drawn from this data is that the RMBS framework simply isn’t working when it comes to the ABS market — and home loans in particular.

The SEC believes that a “robust registered ABS market” benefits both investors and the market by providing:

• a wider investor base,

• investor protections, 

• public disclosure, and 

• greater transparency and liquidity. 

For prospective homeowners, registered RMBS issuances promote residential mortgage market liquidity, helping to mitigate high interest rates and making home loans more affordable.

But here’s the problem.

While a robust registered ABS market can benefit investors and homeowners, the data suggest that the amendments made to Regulation AB pursuant to the Dodd-Frank Act (i.e., Regulation AB II) are having the opposite effect. Instead of promoting a robust ABS market, the law may be inhibiting it. To address this and hopefully revive the RMBS market, the SEC is soliciting input from market participants on how the law should be changed to promote RMBS registration. 

The SEC is Seeking Public Comment on these RMBS Issues 

The SEC concept release identifies two major issues on which the SEC would like public input.

The first one is whether the RMBS asset-level disclosure requirements are creating significant barriers to the return of private-label RMBS issuance to the registered market. Current feedback on the issue indicates that certain data points required for registration are difficult or impossible for issuers to obtain, or they are irrelevant or they duplicate information sought elsewhere.

The required disclosures are also concerning because they require personal information like an individual’s home address and financial information. This raises tough issues of how to provide enough information for investors to make their decisions, yet protect consumer privacy and confidentiality. One potential solution being considered to address the privacy issues is creating issuer-sponsored websites. This isn’t a new solution. However, when suggested initially years ago — before we were all conversant with the internet and websites — the idea met with a lot of resistance from market participants. Given the technological advancements in website use and security, the SEC is re-visiting this potential solution. 

The second major issue is the definition of “asset-backed security.” Much has changed in the securitization market since the definition was originally adopted in 1992, including the introduction of a different definition of “asset-backed security” by the Dodd-Frank Act in 2010 and different asset classes. Among other things, over the years, the use of two distinct definitions has proven to be burdensome and confusing. And, says the SEC, it may be contributing to the lack of RMBS offerings. On top of this, the current definitions of asset-backed securities no longer make sense given current market trends and technological advancements in securitization. For these and other reasons, the SEC is seeking input on how to change the outdated definition of “asset-backed security.” 

The SEC’s concept release on residential mortgage-backed securities disclosures and enhancements sets out specific questions relating to each issue on which the SEC seeks input. In addition, the agency is soliciting general comments on any aspect of the ABS regulations that the public believes should be, or could be, improved. The SEC wants to hear from market participants regarding what steps it can take to revive the RMBS market. 

Interested parties have until 60 days after the concept release is published in the Federal Register to submit their comments.

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