Chris DiAngelo, Partner for Katten Muchin Rosenman LLP
Chris DiAngelo was the Chairman for iGlobal Forum’s 3rd Securitization Finance Summit last week. He is the co-head of Katten Muchin’s structured finance practice and also serves as the head of Katten’s New York office. With over 30 years of experience in the financial services industry, Chris is best known for his experience in housing and mortgage finance. Most recently he has been very active in helping to launch the securitization industry’s new trade association, the Structured Finance Industry Group, and was a great addition to our program.
Q: How has the securitization market changed through your experience?
A: I honestly do not think that the securitization industry has changed that much. The technique really has not changed, specifically because it is an almost ideal financing technique for a wide variety of businesses that themselves have not fundamentally changed. Obviously the industry – particularly the mortgage finance part of it – received a big black eye during the 2008 meltdown, and that has led to a slow recovery in many asset classes as we work through regulatory and reputational issues.
It is very encouraging to see securitization as a financing technique being extended to new asset classes, such as the REO Rental business and also residential solar energy systems.
Q: How will incoming regulations affect future investments and the ability to securitize assets?
A: Overall, I expect new regulations to have a slight negative impact on an issuer’s ability to securitize assets. Many issuers feel that these regulations resulted from problems with two and only two asset classes: subprime mortgages and collateralized debt obligations (CDOs) – particularly CDO’s backed by subprime mortgages. Securitization plays a huge role in the financing of the auto and equipment industries, and there were absolutely no problems at all in either of those sectors. Yet those industries will now have to pay increased compliance costs, most of which will be spent on fixing problems that did not exist. I do agree that, certainly with respect to mortgages, further regulation was necessary to encourage investors back into the market, but investors did not abandon other asset classes, and I just think the regulatory brush has been too broad.
Q: Which regulations have not yet left their full impact on the market? What new changes can we still expect?
A: The biggest regulatory event on the horizon is not a regulation per se, but the further unfolding of the efforts to “reform” the two government-sponsored entities, Fannie Mae and Freddie Mac. These entities still have a very outsized presence in the nation’s mortgage markets, and it is very difficult for the private market players to gear up until they have a better sense of what will happen with Fannie and Freddie.
The mortgage industry is also waiting to see what happens once the CFPB’s ability-to-repay “qualified mortgage” rule goes into effect early next year. Although the rule has been finalized, a number of interpretive questions remain. In addition, it is not yet clear how the rating agencies and investors will react to the new rule.
Apart from the mortgage-finance specific rules, there are also of course the risk retention rule re-proposal, the next steps on the Volcker Rule, the securitization conflicts of interest rule and Reg ABII. Clearly, regulatory uncertainty will continue to be the “name of the game” as we head into 2014.
Q: How do the risk levels compare between the securitization market and other asset classes?
A: In theory, securitizations should not be all that risky, as they are subject to fairly rigorous modeling and, again in theory, should not be negatively influenced by concerns regarding “poor management” or other risks that are difficult to quantify.
What happened in the subprime mortgage market of course disproves that theory to some extent. The market had convinced itself that house prices would always go up, hence there was no great need to focus on borrower credit. Securitization works best as a financing technique for financial assets – such as mortgage notes – and far less well for non-financial assets, such as real property, which is essentially what happened in the subprime space. Once securitization gets away from its basics, it does not work so well.
Q: In the current state of the securitization market, how has the issuer’s access to the market and role in it changed?
A: Outside of mortgage finance, I do not think that a potential issuer’s access to the securitization market has changed all that much. Securitization has become a more expensive option in terms of fees, but the overall transaction execution is still quite attractive. As mentioned above, two new asset classes, REO Rental and residential solar, have debuted in the past month. There is no doubt in my mind that securitization is here to stay as a capital markets product, and we in the industry look forward to extending this very efficient funding tool to more industries.