Fintech Regulation Tion Within the System,” Said Cliff Stanford, a Partner at Alston & Bird

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001_ASR1119 1 11/19/2019 8:59:10 AM Ideas you can take to work Structured finance professionals look to Asset Securitization Report for policy and regulation changes that will shape their business strategy.

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Editorial Senior Editor: Glen Fest [email protected]; 817.847.8041

Art Director: Neesha Haughton Bots ascending [email protected]; 212.803.8815 Contributors Brad Finkelstein, John Hintze, Brendan Pederson, Penny In February, a startup company with dual headquarters in Israel and New York Crosman launched what is believed to the first “A.I.” securitization – a transaction of unsecured Group Editorial Director, Banking & Capital Markets consumer loans that was fully structured, collateralized and sold to a private investor Richard Melville using only the firm’s proprietary artificial-intelligence platform. [email protected]; 212.803.8679 Pagaya Investment’s inaugural deal was unique in two ways. Executive Director, Content Operations and Creative Services The deal was collateralized by Pagaya’s loan-selection tools that bid on individual Michael Chu loan assets, rather than taking on pre-selected pools of loans from a marketplace [email protected]; 212.803.8313

lender. The platform uses algorithms covering more than 1,600 attributes to provide Publishing unique insight into projected risks and returns on each unique loan. VP Capital Markets Division: Harry Nikpour 212.803.8638 Secondly, the assets will also be managed through the platform’s machine-learning Associate Publisher: Louis Fugazy analysis, with buy/sell/hold decisions on the actively managed portfolio determined by 212.803.8773 algorithms rather than the judgment of a living, breathing asset manager. Senior Marketing Manager Pagaya’s technology has been used to build and market three subsequent deals this Jamie Billington year. This month, ASR looks at how Pagaya and other firms are raising A.I’s influence in financial services and asset management strategies. - Glen Fest Chief Executive Officer: Gemma Postlethwaite

Chief Financial Officer: Debra Mason

Chief Strategy Officer: Jeff Mancini

Chief Revenue Officer: Dave Colford

Chief Content Officer: David Evans

VP, People & Culture: Lee Gavin

asreport.com November/December 2019 Asset Securitization Report 3

003_ASR1119 3 11/19/2019 8:59:10 AM Contents

06 ABS: Packaged by AI, Managed by AI Banks and lenders have made inroads in analytics and automation with machine-learning technology. Will asset management follow suit?

Observation ABS MBS 05 Doing better by MPLs 19 Flexing fintech regs 22 JPMorgan’s CRT play The CFPB should offer some form of guid- Thwarted so far at the federal level, financial The notes in JPMorgan’s new credit-risk ance to spur innovation, a former official tech companies are hoping states will work transfer deal are structured to reference a with the bureau says. jointly toward regulatory standards. pool of 979 mortgage loans that will remain on the bank’s own books. CLO 20 Speedbump in subprime Santander Consumer sees an uptick in 23 GSEs: Bring it on 14 Tetragon’s debt play subprime auto loans, with more than usual Housing finance reform could bring new The asset management firm will comple- defaulting within months. entrants to the secondary market. Fannie ment its CLO equity strategy by also adding and Freddie execs say they welcome the exposure to the debt side of loan portfolio possibility. deals.

16 Lacking ‘J.Crew blockers’ Despite concerns over tactics that unilaterally remove assets from loan packages, few lenders have sought to block such moves.

18 Golub’s SaaSy debut The middle-market lender markets its first securitization backed by ‘late-stage’ loans to VC-funded “software-as-a-service” firms.

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Asset Securitization Report - (ISSN # 1547-3422) Vol. 19, No. 8, is published 8 times a year by SourceMedia, One State Street Plaza, 27th Floor, New York, NY 10004. Postmaster: Send address changes to Asset Securitization Report, SourceMedia, One State Street Plaza, New York, NY 10004. For subscriptions, renewals, address changes and delivery service issues contact our Customer Service department at (212) 803-8500 or email: [email protected]. All rights reserved. Photocopy permission is available solely through SourceMedia, One State Street Plaza, 27th Floor, New York, NY 10004. For more information about Licensing and Reuse of Content: Contact our official partner, Wrights Media, about available usages, license and reprint fees, and award seal artwork at [email protected] or (877) 652-5295 for more information. Please note that Wright’s Media is the only authorized company that we’ve partnered with for SourceMedia materials. No data herein is or should be construed to be a recommendation for the purchase, retention or sale of securities, or to provide investment advice of the companies mentioned or advertised. SourceMedia, its subsidiaries and its employees may, from time to time, purchase, own, or sell securities or other investment products of the companies discussed or advertised in this publication.

4 Asset Securitization Report November/December 2019

004_ASR1119 4 11/19/2019 8:59:14 AM Observation

structed? How can companies ABS: Packaged by CFPB can do better by MPLs use such a model in access to credit evaluation and disparate AI, Managed by AI The bureau should offer some form of guidance to spur innovation, impact testing? What are the Banks and lenders have made steps firms may take to monitor inroads in analytics and automa- a former official with the bureau says tion with machine-learning tech- and manage disparate impact nology. Will asset management risk? follow suit? By Dan Quan While there may be many paths to compliance, answers The Consumer Financial Protection Bureau staff issued a no-action letter to Upstart in to those questions will provide recently finalized three policy tools meant to 2017. In addition to market signaling, one specificity so firms can learn and promote financial innovation by offering some primary goal of the letter was to afford the develop their own compliance regulatory certainty. But the agency may need CFPB a ringside seat to gain experience and approaches. Sharing the lessons to go further to convince fintechs such tools expertise that would enable the agency to for- from the Upstart no-action letter are safe and beneficial. mulate a sound, general policy in the future. essentially provides an example Two of those tools — the no-action letter The Upstart letter has a number of novel of a safe harbor for fair-lending and the compliance assistance sandbox — ideas. compliance that can address equip the CFPB with broad authorities to For example, a (very welcome) regulatory much of the existing regulatory address various regulatory questions, includ- innovation is the use of a hypothetical model uncertainty. ing fair-lending risk associated with the use that contains traditional application and cred- It is also important for the of machine learning and alternative data in it variables, but does not use machine learning CFPB to work with the pruden- MBS credit underwriting. as the baseline for credit-access analysis and tial banking agencies to issue One example of this is in an August blog disparate impact testing. formal fair-lending compliance 22 JPMorgan’s CRT play post that updated its first issued no-action let- Too often, regulators compare the out- guidance, since bank regulators The notes in JPMorgan’s new credit-risk transfer deal are structured to reference a ter to Upstart Network, an online marketplace comes of innovation to a distant ideal rather enforce the Equal Credit Oppor- pool of 979 mortgage loans that will remain lender that uses alternative data for under- than an imperfect status quo. Regulatory real- tunity Act. on the bank’s own books. writing. In the post, the CFPB encouraged ism that recognizes the value of incremental This would benefit not only fintech lenders to take advantage of such improvements and gradual harm reduction is fintechs but incumbent banks 23 GSEs: Bring it on Housing finance reform could bring new policy tools to reduce their own fair-lending a step in the right direction. that also wish to safely use entrants to the secondary market. Fannie compliance risk. The Upstart no-action letter for the first machine learning and alterna- and Freddie execs say they welcome the More of these no-action letters that offer a time provides a detailed roadmap of fair- tive data in their credit deci- possibility. “safe harbor” from the CFPB might benefit a lending compliance. Unfortunately, all of the sions. Such joint guidance would handful firms, but the market as a whole will regulatory and compliance innovation in the provide ultimate certainty to the not reap the rewards until the agency issues letter is confidential and so far, benefits just entire marketplace. generally applicable guidance. one company. While the Upstart no-action When Upstart applied for the no-action The regulatory uncertainty that existed in letter was an example of policy letter in 2017, there was a tremendous amount 2017 remains unchanged. What has changed, innovation, issuing more of such of regulatory uncertainty around disparate however, is that the CFPB (through the Upstart letters on the same ground would impact testing — when disparities are found collaboration) has now developed a wealth be equivalent to innovation-by- between groups, though unintentional — as of knowledge about how to manage and permission. Let the market do related to the use of machine learning and mitigate fair-lending risk for machine learning what it does best: innovation nontraditional data. models. through competition. ASR Regulatory agencies had little experience Now is the time to leverage those insights with those new and innovative credit models. to develop policies that benefit not just Up- Dan Quan is an adjunct scholar And there was little regulatory guidance to start but the entire industry. at the Cato Institute’s Center for help new fintech lenders monitor and man- A good start would be for the CFPB to dis- Monetary and Financial Alternatives. age the enhanced fair-lending risk inherent in close key aspects of model risk management He was previously was a senior ad- those models. and compliance from its first no-action letter. viser to the director of the CFPB and It was against that backdrop that CFPB How should a hypothetical model be con- head of the bureau’s Project Catalyst

asreport.com November/December 2019 Asset Securitization Report 5

005_ASR1119 5 11/19/2019 8:59:15 AM Packaged by AI, managed by AI Banks and lenders have made inroads in analytics and automation with machine-learning technology. Will asset management follow suit?

By Glen Fest

Gal Krubiner is clicking through a PowerPoint presentation on his laptop, pausing on a picture of a 1980s era New York Stock Exchange floor. “Recognize that?” he asked. “You have 5,500 people working there. You had people trading from the stomach. The back office was full of papers – everything was different,” said Krubiner (who, it should be noted, at 31 years old came of age well after the photo was taken.) “Ninety percent of those people became irrelevant.” Krubiner, the chief executive of New York-based Pagaya Investments, is not giving a history lesson. He’s pitching the idea that technology firms are poised to do something similar in asset-backed securities and institutional asset management. Earlier this year, Pagaya, a startup led by three Israeli-born principals, with tony offices in both New York and Tel Aviv, launched what it said was the securitization’s industry first robo-deal – a fully automated transaction in which collateral was compiled, priced and sold without

6 Asset Securitization Report November/December 2019

006_ASR1119 6 11/19/2019 8:59:23 AM Packaged by AI, managed by AI

asreport.com November/December 2019 Asset Securitization Report 7

007_ASR1119 7 11/19/2019 8:59:24 AM any assist from human intervention. function as online chat advisors to asset classes like auto loans and mort- In the privately placed, $100 million consumers. gages – but can also gather and crunch deal, Pagaya’s artificial intelligence A.I. is also being deployed by lenders more opaque information such as platform pooled together individual, and institutions for credit-decisioning, individual consumer behavioral data that unsecured consumer loans directly from consumer behavioral analysis, fraud might not be apparent in loan apps and the managed portfolio of (at that time) an detection and internal operations. New credit bureau files. undisclosed lender. Typically, buyers of York-based AlphaSense has developed an “The big managers, they’re all going to marketplace loans usually bid on static, A.I.-based search engine used by banks be thinking about this as part of their preselected folders of loan collateral com- and investment firms to analyze public portfolio,” including both in tactical piled by the issuer. corporate filings, research and news strategies (i.e., trading and reinvestment) The portfolio compilation criteria on stories through natural language process- and improving efficiencies and transpar- the deal – and three subsequent issuing to ferret out trends in financial ency to investors, said Bailey. ances that have involved loans acquired markets. from Prosper and LendingClub – were Under the hood based on criteria encoded into the firm’s “The concept to understand is In Pagaya’s case, the loans it acquires proprietary A.I. platform. The benchmarks there is no ‘good’ or ‘bad’ loan,” and securitizes through its platform – says Krubiner. “There is a loan that for choosing the loans involve more than Pagaya AI Debt Selection Trust – are is priced well or not.” 1,600 attributes that Pagaya assigned chosen and bid on based on algorithms from across any number of data points: In addition, A.I. is being tapped for eco- that measure an array of data beyond borrower credentials, loan market and nomic analysis and market predictions. borrower FICOs, payment history and job investor trends, macroeconomic factors, Cambridge, Mass.-based Kensho Tech- title. etc. nologies, for example, is a hedge-fund Pagaya will apply macroeconomic That same technology is also being markets analyst software firm that got data, for instance, to individual loans that used to actively manage the portfolio attention for projecting an extended drop may uncover hidden risks. going forward with a short-duration, in British currency following the 2016 Krubiner points to examples such as an high-yield strategy of buying and selling Brexit vote in the UK, according to Fortune unsecured loans to a construction worker

loan assets determined by the cold logic magazine. and a nurse. While both may have similar PAGAYA from data accumulated by Pagaya’s (Kensho was acquired by S&P Global in credit scores and income, the construction machine-learning tools. 2018 for $550 million). worker is in a field with four times the “The concept is very simple,” said These first steps for big data analytics historical employment volatility of the Krubiner. Pagaya is “taking the three into financial services makes A.I. in healthcare worker. layers of asset management – deploy- portfolio and credit management a So instead of taking on both loans with ment, performance and operations – and natural next step, said Brad Bailey, a similar attributes with similar bids, Pagaya asking the question if we need, and we do, research director in capital markets for might avoid the higher-risk loan or seek a to be an asset manager from scratch in fintech research firm Celent. premium for it. data-driven asset classes, how does it “When you look at fixed income Pagaya may also consider paying a look like?” broadly and credit broadly, it’s how higher rate on a loan that is safer than its people manage – not just down to the surface details reveal, if the algorithms Rise of the bots details of that construction, but how are determine the rate is right. Machine-learning inroads into financial you going to manage your hedges, your “The very basic type of [lending] services has been well documented in pricing and your, the different things that models will ask the question, what is the recent years. happen within the tranches,” said Bailey. [debt-to-income]. What is the monthly BNY Mellon has launched A.I.-based “This can all be done in much more income and therefore what is the interest “bots” to automate many of bank’s effective ways then it’s done.” rate?” said Krubiner. “But when we are an functions that were previously manual A.I. can help ABS investors in several asset manager, we care more than tasks from employees (such as clearing ways. The tools can make greater use of everything [about] performance. Not to U.S. Treasuries). reams of available data – such as faster lose money. We want to be in a situation Banks like BMO Financial Group and comparisons and risk/return projections where if the crisis comes, we are better off Nordic bank Nordea are using A.I. to from Reg AB-II and disclosure data in with our portfolio.”

8 Asset Securitization Report November/December 2019

008_ASR1119 8 11/19/2019 8:59:25 AM PAGAYA

Pagaya Investments chief executive officer Gal Krubiner

Pagaya’s technology, using API no ‘good’ or ‘bad’ loan,” said Krubiner. once served as global head of technology connections with its MPL partners, will “There is a loan that is priced well or not.” for investment management at Goldman continue monitoring each loan it purchas- Sachs, and now leads fintech investments es for institutional clients like Citigroup “What the technology ultimately for venture capital firm Oak HC/FT (a key – scoring the underlying borrower’s does, it’s making a personalized investor in Pagaya). updated credit profile, the lender’s decision...that’s what the algorithm ”This is what would have happened underwriting model and managed is doing at scale.” before FICO existed. [Bankers] would call portfolio performance, among other you up. They would call your friends, do factors. Alternative data you work a steady job. They would look The goal is to formulate projected Dan Petrozzo, a veteran technology you in the eye, are you a good person. returns for Pagaya’s clients based on the venture capitalist, likens the A.I. evolution “Effectively, that’s what the [A.I.] thousands of data points that might to an ironic return to classic investing and algorithm is doing at scale.” uncover attributes that mitigate or lending: making more intrinsic decisions The core, fundamental skillset for enhance the decisioning factor. based on data that bankers and issuers lenders, investors and fixed-income This will factor in the ongoing manage- may only otherwise glean from deep, managers is derived from a simple ment of the asset within the portfolio that one-on-one interaction. concept. promises a greater level of operational “It’s very interesting. What the What is a good investment – and what savings and less “from-the-gut” thinking technology ultimately does, it’s making a is a bad bet? on buying and selling. personalized decision based upon a For decades, firms have increasingly “The concept to understand is there is whole bunch of data,” said Petrozzo, who poured millions into their intelligence-

asreport.com November/December 2019 Asset Securitization Report 9

009_ASR1119 9 11/19/2019 8:59:27 AM gathering mission to gain an edge to raise biz lender Fundbox. (Pardo deployed A.I. management was first pioneered in equity the odds of finding the former and in building a platform that created trading by firms like Two Sigma Invest- avoiding the latter. ability-to-pay projections for small- and ments, the New York-based hedge fund But in the new era of big data, one in medium enterprises, said Krubiner.) founded in 2001 which adapted A.I., which artificial intelligence and machine- Pardo and Krubiner launched Pagaya machine learning and distributed learning tools are taking center stage in in 2016 with another Israeli tech industry computing into its trading strategies. firms’ back offices, a new dynamic is entrepreneur, Yahav Yulzari. It was seeded “These types of companies sort of set taking shape. with early investments from the $2.5-bil- the groundwork for how you can use lion asset Viola Ventures in Israel. Pagaua computers to an advantage… in the “All the limitations that existed received a later investment from retired buying of securities. But they tend to still even five years ago are gone,” said American Express chief executive Harvey be very much on the short-term trade, not Bailey. “If you have a good data set, you can run.” Golub during the firm’s Series B funding in on a buy and hold strategy,” said Petro- August 2018 (“He literally gave us the first zzo. “That’s not like how we would how we What if the best way to choose million dollars,” said Krubiner). Golub would think as investors about asset investable assets is no longer a binary became a member of Pagaya’s board, management.” “yes-or-no” question? which is chaired by Viola Group partner A.I. is gaining traction in financial Analytics have been a long been staple Avi Zeevi. services because of the results that of investor decisioning and risk manage- The faith from early believers in A.I. financial services firms are reaping from ment, but the new A.I. promises a deeper jumpstarted Pagaya to raise more than investments in the technology. trove of alternative data, said Celent’s $950 million in capital used to acquire its In a report earlier this year, Deloitte Bailey. loans, of which more than $515 million surveyed 206 global financial institutions “If you think about what [lenders and have been securitized in private deals via on the impact of institutions’ use of A.I. issuers] have done with thinking about Cantor Fitzgerald. The four deals have technology (such as advanced analytics, how they look at credit, how they look at made Pagaya a top-10 issuer in the MPL process automation, “robo” advisors and credit rating, how they look at the ABS space in 2019. (It’s most recent deal self-learning programs”), consumer or other types of credit,” priced in October, topping $200 million in Deloitte found that “frontrunner” securitization investors can also take the loan-backed securities). institutions in A.I. investments gained 19% deeper dive different types of machine Pagaya had its eye on securitization returns on their machine-learning outlays learning algorithm to gain the same early by recruiting an asset-backed compared to 12% for firms that have not insight, said Bailey. specialist as its first employee. Benjamin adopted these tools as widely. “You might have found something that, Blatt, a Capital One veteran as well as the Deloitte pointed to Nordic bank [for example], there’s a 3 percent correla- former capital markets manager for Nordea as a firm using AI in multiple tion between certain assets. Has that student-loan refinancing firm Common- ways across its organization. The been something investors worry and think Bond, joined the firm in a similar capital company developed an internal chatbot about?” markets post for Pagaya in 2017. (He (“Nova”) which used natural-language Krubiner said that while big-data worked out of a shared WeWork space in processing for responding to online analytics is nothing new, what institution- the same New York building where customer queries, and looking at means al clients have lacked in portfolio man- Pagaya now has its co-headquarters to automate claims handling, fraud agement is collateral context. location). detection and personalizing recommen- The views into underlying assets may In 2018 Pagaya recruited former dations for clients. be too opaque – or in the case of assets BlackRock managing director Ed Mallon Industry adoption is also easier backed by online consumer loans, too as chief investment officer, with plans to because the barriers for entry have new – to properly assess the “value propo- expand Pagaya’s investment platform dissolved for upstart tech firms. The sition” from the buy-side perspective that into new asset classes including mort- massive investments in computing power Pagaya’s platform and its technology gages, real estate and auto loans, and storage has shrunk with the availabil- seek to attain. according to Krubiner. ity of affordable cloud services, noted Pagaya’s platform buildout was led by Bailey. “All the limitations that existed even chief technology officer Avital Pardo, who Adoption grows five years ago are gone,” said Bailey. “If you was a data scientist and analyst for small- Petrozzo said AI’s applicability to asset have a good data set, you can run.” ASR

10 Asset Securitization Report November/December 2019

010_ASR1119 10 11/19/2019 8:59:27 AM How BNY is going further on AI

While several traditional banks are testing artificial While several traditional banks are testing artificial intel- intelligence, BNY Mellon says it’s going further than most, ligence, BNY Mellon says it’s going further than most, committing to the technology by involving it in multiple committing to the technology by involving it in multiple aspects of its business. aspects of its business. “We’re not experimenting with AI, we’re really doing it,” “We’re not experimenting with AI, we’re really doing it,” said Roman Regelman, senior executive vice president and said Roman Regelman, senior executive vice president and head of digital for the bank. head of digital for the bank. Among other things, BNY Mellon has deployed 300 bots Among other things, BNY Mellon has deployed 300 bots using robotics process automation software from Blue using robotics process automation software from Blue Prism. While some purists do not consider them full- Prism. While some purists do not consider them full- fledged AI, bots are widely seen as a low-IQ form of AI that fledged AI, bots are widely seen as a low-IQ form of AI that automate simple tasks previously performed by human automate simple tasks previously performed by human beings. At BNY Mellon, the bots are deployed across beings. At BNY Mellon, the bots are deployed across businesses and functions and execute about 5 million businesses and functions and execute about 5 million processes. processes. “These robots are doing manual work,” Regelman said. “These robots are doing manual work,” Regelman said. “They’re doing stuff that humans can do, but don’t like to “They’re doing stuff that humans can do, but don’t like to do, and often don’t do that well. That allows the humans do, and often don’t do that well. That allows the humans we have, the employees, to spend time on more value- we have, the employees, to spend time on more value- added activities, like spending time with clients and added activities, like spending time with clients and spending time on more complicated cases.” spending time on more complicated cases.” Analysts have taken note. “BNY Mellon is a more visible Analysts have taken note. “BNY Mellon is a more visible part of the big-bank pack who three or four years ago were part of the big-bank pack who three or four years ago were just reaching the point of 100 bots each of varying just reaching the point of 100 bots each of varying sophistication in proofs of concept, alpha and beta tests,” sophistication in proofs of concept, alpha and beta tests,” said David Weiss, principal analyst at Market Structure said David Weiss, principal analyst at Market Structure Metrics. Metrics. – Penny Crosman

asreport.com November/December 2019 Asset Securitization Report 11

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012_ASR1119 12 11/14/2019 4:50:56 PM What is preventing your CLO business from achieving scale? Explore how our cutting-edge technology and industry-leading expertise Does your CLO trustee combine to reveal your big picture. Connect with Our Expertise see the big picture? Partner with Citi-Virtus Automate and introduce straight through processing. Helping to prevent errors, stop duplicating efforts and avoid bottlenecks at all stages of CLO management.

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013_ASR1119 13 11/14/2019 4:50:56 PM CLO

deliver exceptional overall value to our investor base. Our success will be driven by strong manager relationships, a deep under- standing of the legal documents, and our ability to select the best risk adjusted credit portfolios.

Any particular reason why minority-equity investing may be more attractive now? When buying minority equity, an investor gives up control of some of the optionality or voting rights that one has as a majority equity investor. It is a different type of analysis and the opportunity has to be more compelling in terms of the risk/reward characteristics. We think the additional yield pickup from minority equity can make sense, but we do think control matters so the risk premium that we demand is definitely higher for minority Q&A: Tetragon’s debt play equity.

Firm will complement its equity strategy by adding exposure “Right now, I’d say there to the debt side of CLO deals are a couple of new asset managers looking to add in By Glen Fest the CLO market.”

Can you can give an overview of what you see in the market for In September, longtime CLO equity invest- ASR: What is the driving the decision to some of those lower-rated ment firm Tetragon Credit Partners expanded expand beyond what has been the traditional mezzanine and subordinate CLO its reach into the market with a decision to control-equity stakes? debt tranches? add CLO debt purchases to its shopping list. Snell: Tetragon has been getting more Recently we have seen increased Since 2004, Tetragon had invested more inbound investor requests, specifically in CLO selling in the secondary market than $2.4 billion across 105 actively managed mezzanine debt. For buy-and-hold investors, of triple-B and double-B-rated collateralized loans, providing the firm and its CLO debt offers a differentiated profile paper. The market is starting to clients returns on the controlling shares of typically providing stable income and credit differentiate based on perfor- broadly syndicated loan portfolios involving ratings, which is important to some investors. mance, underlying credit quality 32 different managers. We also think there are times when the and how managers are reacting Scott Snell, portfolio manager for Tetragon market is more volatile where active trading to market conditions. This year a Financial Group and one of the firm’s three strategies present attractive total return few loans have had violent price principals, discussed the new strategy as well opportunities. By taking our expertise in CLO movements on the back of as observations of the 2019 CLO market and equity and applying it to building portfolios in missed earnings or some type of

TETRAGON his 2020 issuance and market-trend outlook. the CLO debt space, Tetragon believes it can restructuring event. With stress

14 Asset Securitization Report November/December 2019

014_ASR1119 14 11/19/2019 8:59:30 AM building in some portfolios, I think the be less invested in CLOs and more portfolio characteristics. In some cases, market has generally reacted appropri- exposed to traditional fixed-income the frequency of issuance and size of ately and we are seeing investors sell out products like investment-grade corporate platform can also create a negative of weaker deals. As a result, the increase bonds. You haven’t seen as much of that supply technical, which may impact in trading activity has created more marginal demand from newer investors, spreads. For equity tranches, investors technical pressure, which has driven which is why CLO liability spreads are typically try to find managers with a pricing wider both in the primary and the relatively wide. And I think given some of similar outlook on the market and risk secondary market. the increased focus on what’s happening tolerance. Every equity investor has to the loan market and negative idiosyn- different hot button issues that they focus So what kind of challenges or maybe cratic credit stories, overall demand has on. For us, we emphasize the manager’s even opportunities does that present to been more tepid this year than in the expertise and track record, the positioning CLO managers? recent past. and spread of the portfolio, and also the Given the growth in the loan market, CLO team’s experience with managing CLO managers have more opportunities to Is manager tiering as pronounced toward structures. Of course, the overall econom- differentiate performance, whether that’s the end of the year; or are more investors ics will also determine how an equity staying in the larger, broadly syndicated maybe becoming more comfortable with investor views a particular transaction. loan universe or taking more liquidity risk these new managers coming on board? by buying smaller loans. I think with some You really have to bifurcate the new-man- Is tiering driven more by return perfor- of the price action you’ve seen this year ager universe. There are a few new mance or overall management skills? and continued retail outflows, it’s really managers that have come to market with Certainly past performance and track given managers the ability to trade very strong capital backing and experi- record are important when evaluating a around their portfolios and to move into enced teams. In many cases, they have management platform. However, there either higher-rated credits or names already issued two or three transactions are other factors to consider such as the where they have strong conviction. We which have been received well by the tenure of the team, compensation think it’s an environment that is ripe for market. On the other hand, there are structure, and the type of organization. CLO managers with good credit-picking other newer managers that might not be Additional considerations include the risk skills to differentiate themselves in terms as well established nor have as strong of profile of the portfolio, credit rating of spread, price and ratings in their a track record. We have seen those new distribution, the diversity score and portfolios. managers struggle as the market has weighted average spread of the underly- demanded higher liability spreads, which ing assets. How is the current investor base impact- makes it very challenging for the arbi- It also is important for investors to ing the issuance volume in CLOs and trage to work. consider manager styles. The market perhaps even how the deals have been I think to the extent the market has gravitated towards more conserva- structured? becomes more friendly and you do see a tively positioned portfolios, given the There is a stable investor base that is pickup in demand particularly for triple recent volatility and some of the always looking to participate either in the As, that dynamic could change. But right concerns about where we might be secondary or the primary market. But now, it’s fairly difficult. headed in terms of the economy. really, what drives spreads tighter or wider However, some investors have shorter is determined by the marginal investor. Does that bifurcation [on pricing] for the holding periods and may focus less on Over different periods of time, you’ll see triple-A level, does that also manifest the long-term credit outlook if they large banks come in and out of the itself in the mezzanine and subordinate intend to sell in three to six months. market (particularly in triple A’s), or it tranches and even the equity stakes? Deal documents and legal language could be certain insurance companies or Definitely you see bifurcation down the have also become a bigger focus. Some overseas institutional investors. Right now, stack. Investors will typically use a similar investors are more concerned about I’d say there are a couple of new asset framework to assess risk in mezzanine getting certain terms, particularly managers looking to add in the CLO tranches as they do for senior debt. around Libor replacement language. market. However, given what’s happened Tiering and pricing levels will depend on a This type of deal term can override with rates, there has been a preference variety of factors, including the manager’s manager tiering criteria, especially for among the asset-manager community to default track record, team experience and some of the largest AAA buyers. ASR

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PetSmart’s successful IPO of Chewy are credit positive for the companies’ lenders because they will use the proceeds to reduce debt,” said Moody’s in an Oct. 10 report that appeared to vindi- cate the tactic.

Rescue via IPO In June of this year, PetSmart raised nearly $900 million from the IPO for Chewy.com, its subsidiary it acquired a year earlier for $3 billion and financed with nearly $2 billion in secured and unsecured debt.

Weak or nonexistent covenants effectively mean lenders have pre-consented to asset stripping

PetSmart had earlier transferred nearly 37% of its stake in Chewy to an unrestricted subsidiary investor group ahead Follow the (J. Crew) blockers of the IPO. The money raised from the Despite concerns over tactics that unilaterally remove assets from IPO allowed PetSmart to pay loan packages, few lenders have sought to block such moves down debt by 15%, according to S&P, as well as see a price boost By John Hintze to its struggling high yield bonds that returned to par pricing in the secondary market, per Bloomberg. PetSmart’s corporate Despite legal tussles a few years ago over used weak covenants in credit agreements to rating benefited, too, being asset transfers from leveraged-loan collateral shift intellectual property to other assets – in raised to B3 from Caa1 by packages, only a small percentage of lenders both cases for initial public offerings of Moody’s and to B- from CCC by have actively sought to block such moves in subsidiary brands that could provide cash S&P. document contracts. needed to tackle the high-leverage woes for The struggling J. Crew chain According to a recent report from S&P the parent firms with near-default ratings. (which carries a corporate rating Global Ratings based on the rating agency’s Moody’s Investors Service described the of Caa2 from Moody’s and CCC review of deals across multiple sectors, only two firms as “infamous” for “aggressively” by S&P) is planning an IPO as 17% of lenders have provisions that would moving key brands into unrestricted subsidiar- well for its Madewell brand. disallow borrowers from using subsidiaries to ies. But perhaps one reason for the current- According to a September transfer collateral assets – such as brands and day low percentage of so-called “J.Crew regulatory filing. J. Crew plans to intellectual property rights – outside lenders’ blockers” may be the success that the issuers repay debt as well as negotiate reach. ultimately had in satisfying their creditors and new terms on $1.9 billion of its Transferring assets became a controversial ratings agencies. debt due in 2021, according to

BLOOMBERG NEWS BLOOMBERG move after retailers J. Crew and PetSmart J. Crew’s planned IPO of Madewell and Moody’s.

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016_ASR1119 16 11/19/2019 8:59:32 AM (Moody’s stated that in order for the weaker or nonexistent covenants and the valuable assets have been transferred. IPO to proceed, J.Crew must still finalize a ability to monetize other assets, Ganz During the financial crisis, maturities debt restructuring plan that would said. aligned to create a “refinancing wall” that provide a settlement of cash and debt- He noted that lenders tend to consent limited the impact of a large number of for-preferred equity with consenting to changes in their loan agreements since borrowers gaining new terms. Today, lenders). it is typically in everyone’s interest for however, most borrowers have recently The IPO filing was preceded by the borrowers to avoid bankruptcy. refinanced their loans and extended their controversial move in 2017 to shift the However, there’s usually a cost for the maturities by several years. Madewell brand into an unrestricted borrower and there may be unanticipated “Maturities have been pushed out, so subsidiary that could issue new debt changes, such as the lending group the reality is there’s very little refinancing ungoverned by the original J. Crew credit becoming more opportunistic and driving risk in the foreseeable future,” Ganz said. agreements, according to S&P. harder bargains. Al Remeza, associate managing director in Moody’s structured finance Exploiting covenant weakness ‘Typical loans now permit issuers group, said that the rating agency’s to take many more actions without According to S&P, most provisions frequent discussions with collateralized paying for the privilege, and allowing assets to be transferred or investors will experience a rougher loan obligation managers and other disposed traditionally yielded proceeds ride in stressed deals lacking these loan investors have clearly revealed that were to be used for reducing loan guardrails.’ their “particular concern” about asset balances or investing in replacement stripping. collateral for the secured lenders. The flip side, he added, is that lenders’ He added that some say they won’t In its report, Moody’s noted however bankruptcy recoveries are likely to be touch loans with asset-stripping provi- that “[w]eak incurrence covenants enable lower than they have been historically. “In sions, and others, given such language borrowers to take actions without getting the event of default, lenders are probably has essentially become standard, focus on lender consents (or paying economic not going to see recoveries that are 75% names they determine to be less likely to consideration for such consent),” Moody’s to 85% on the dollar.” default. wrote in its report. Ganz added that the low percentage J. “So there are competitive forces at play “Typical loans now permit issuers to Crew blocker deals found by S&P likely here, and clearly investors don’t like it,” he take actions many more actions without was due to the asset class’s attractive said. paying for the privilege, and investors will yields and the late stage in the credi Derek Gluckman, senior covenant experience a rougher ride in stressed cycle, giving borrowers significant officer in Moody’s corporate finance deals lacking these guardrails without the leverage in negotiating terms. Neverthe- group, noted that weak or nonexistent cushion that consents and consent fees less, he said, the issue has been highly covenants effectively mean lenders have used to provide.” publicized and the deal terms are “pre-consented” to asset stripping or other Elliot Ganz, the Loan Syndications & transparent, so investors are making moves favorable to borrowers that Trading Association’s (LSTA) chief of staff rational credit decisions under the previously would have required lender and general counsel, said that while he circumstances. approval. does not condone the transfers, they In the end, he added, lenders likely present a nuanced issue given that, Investor concerns still growing would have consented to such moves in similar to “cov-light” deals excluding S&P noted in its report that courts have many instances, but by pre-consenting maintenance covenants, they give not ruled on the legality of the transfers, they give up any say over those critical borrowers more flexibility. since investors’ legal challenges were decisions and the fees they received for “If you look at PetSmart and J. Crew, settled out of court. The report adds that consenting to them. would you rather have the current while many loan investors understand the “Covenants gives borrowers control outcome or instead have the company potentially significant risks of IP-leakage over when these things happen,” Gluck- with less flexibility and filing for bank- risk, also known as “J. Crew blockers.” man said. “Particularly in a down cycle, ruptcy?” he said. Still, a downturn is potentially looming, lenders get nervous when they start Consequently, when the economy and refinancing risk increases when the seeing divergence of opinion, but now it’s sours, there likely will be fewer defaults economy sours and lenders pull back. going to be borrowers controlling the because of the flexibility provided by That risk increases further if a borrower’s show. ASR

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program since its founding in 2013: zero defaults and no credit losses in the 40 loans issued to date totaling $2.5 billion, according to Kroll. The loans in the pool are from 37 obligors. The capital stack includes a $208.57 million Class A notes tranche yielding 4.75% interest, with an A rating from the agency. Golub, through its GC In- vestment Management affiliate, will also securitize $133.35 million in subordinate notes.

‘Late-stage’ firms have much lower debt-service levels and half the LTV ratios of middle-market firms Golub typically serves.

The report did not state whether those notes would be Most of the loan were underwritten to newly launched SAAS startup firms retained, but issuers of middle- market/small enterprise loans typically retain substantial Golub’s SaaSy debut portions of deals on their books to share “skin in the game” with Middle-market lender’s first securitization backed by loans made investors. to VC-funded firms that have yet to generate earnings GC Investment Management is a unit of GC Advisors, which By Glen Fest manages loan portfolios issued through Golub’s middle-market CLO platform. The deal will launch with a Golub Capital Partners has priced its first-ever its standard underwriting, the late-stage loans 61% advance rate on the collat- securitization of loans issued through its are for funding VC-backed startup firms that eral. According to Kroll, Golub’s “late-stage” lending program for promising, have not yet developed earnings or have low late-stage loans are underwritten venture-capitalized software firms. loan-to-value ratios. to “realized or contractual” recur- The middle-market capital specialist will be The loans to these firms have much lower ring revenue, rather than earn- collateralizing $340.8 million in loans through debt-service levels and about half the LTV ings that are the basis of the its a new asset-backed note structure being ratios of the middle-market firms that Golub middle-market loans that make managed by an affiliate of its middle-market traditionally serves. up the bulk of activity for the collateralized loan obligation (CLO) manager. And Kroll Bond Rating Agency has assessed firm, which has over $30 billion in Most of the loans securitized in the Golub the loan’s credit quality in the triple-C cat- capital under management. Capital Partners ABS Funding 2019-1 portfolio egory, presenting higher risk and potentially Golub markets the late-stage are from the late-stage program that under- lower recoveries for investors. loans as “flexible credit solutions” writes newly launched firms in the software- But the loans offer investors greater growth that provide working capital for as-a-service (SaaS) sector. opportunities, and Kroll notes the strong per- firms without requiring the sur-

ADOBE STOCK ADOBE Unlike the corporate loans offered through formance of Golub Capital’s late-stage loan render of further equity. ASR

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“There’s a genuine desire among regulators to open the door to allowing more innova- 'Flexible' fintech regulation tion within the system,” said Cliff Stanford, a partner at Alston & Bird. “But there are elements of our legal structure that would More multistate compacts constrain those efforts without some real change.”

No-action letters for individual firms ‘Without a single, comprehensive strategy for financial regulation, Regulatory sandboxes for new products regulators will continue to be at odds’

The ITIF argues that when Self-regulation states move together on supervi- sion, innovators with national ambitions can focus on innovat- Source: Information Technology & Innovation Foundation ing, rather than complying with 50 different state regimes. The report points to Vision 2020, a project launched by the Con- ference of State Bank Supervi- sors last year to streamline the Flexing on fintech regs licensing process for fintechs operating across state lines, as Thwarted so far at the federal level, financial techcompanies are one example. “Without a single, hoping states will work jointly toward regulatory standards comprehensive strategy for financial regulation, regulators By Brendan Pederson will continue to be at odds, and states will continue to pass mis- matched rules that raise costs and reduce consumer welfare,” As federal regulatory options for fintech firms That has left the industry, which is currently the report said. remain elusive, many in the space are pushing overseen by dozens of state regulators, seek- To date, that approach has for the creation of an alternative “flexible” ing other options. The Information Technol- seen some success in the U.S. — supervisory regime that relies on existing au- ogy & Innovation Foundation, a Washington namely with reaching multistate thorities and a more collaborative approach think tank with a history of tech-friendly agreements on the use of certain from state agencies. policy stances, issued a report in October technologies and money trans- The Office of the Comptroller of the Cur- that included a range of suggestions, includ- mitter licensing — especially rency has so far been stymied in its attempts ing more multistate compacts and reciprocity when paired with a backstop at to create a national fintech charter, with agreements among state agencies and the the federal level. “Frankly, fintech it planning to appeal a court decision last expanded use of no-action letters and regula- companies would like to see month that threw out its proposal of the idea. tory sandboxes. the efforts on passporting and The Federal Deposit Insurance Corp., mean- But the recommendations face headwinds in the money transmitter space while, appears to still be debating whether in the current political environment, with law- expanded to other product lines,” to grant industrial loan company charters to makers skeptical of technology firms’ attempts said John Kromer, a partner at fintech applicants. to break into banking. Buckley LLP. ASR

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original lender and away from bond investors. “This could eventually be a problem for the company and impact its actual performance,” said Kevin Barker, an equity analyst at Piper Jaffray & Co. Souring loans can cut into profit- ability, he said, adding that the company can raise its lending standards to reduce losses on new financing it provides.

“The situation is somewhat perverse in that bondholders are acutally benefiting from high early- payment defaults...”

A Santander Consumer USA spokeswoman said the firm’s asset-backed securities performance has been consistent over time, and are structured with credit enhancement levels Rising losses may be a sign weaker borrowers are having financial troubles that are appropriate for the risk profile of the securitizations. The firm “does repurchase loans from Speedbump in subprime its securitizations for various reasons, which have been con- Santander Consumer sees uptick in subprime auto loans, with sistent over time and in line with more than usual defaulting within months the requirements of our transactions,” she said. On earnings calls this year, ex- ecutives at Santander Consumer A growing percentage of Santander Consumer tion information, a problem the company has have said that the company is USA Holdings Inc.’s subprime auto loans are had before, and that weaker consumers are less likely to cut deals with bor- turning out to be clunkers soon after the cars increasingly struggling. During last decade’s rowers that fall behind on their are driven off the lot. housing crunch, mortgage loans started sour- obligations now. That results in Some loans made last year are souring ing within months of being made. the lender writing off more bad at the fastest rate since 2008, with more Subprime car loans aren’t in a crisis, but loans, but also cuts the balance consumers than usual defaulting within the lenders across the industry are facing more of troubled credits it is looking to first few months of borrowing, according to difficulty. Delinquencies for auto loans in restructure. analysts at Moody’s Investors Service. Many of general have reached their highest levels this those loans were packaged into bonds. year since 2011. Chrysler Tie Santander Consumer is one of the larg- Santander Consumer had sold to bond in- Santander Consumer had $26.3 est subprime auto lenders in the market. vestors many of the loans that are going bad. billion of subprime auto loans as The rapid failure of some of its loans implies When the debt sours soon after the securities of June 30 that it either owned, that a growing number of borrowers may be are sold, the company is often obliged to buy or bundled into bonds, according

BLOOMBERG NEWS BLOOMBERG getting loans based on fraudulent applica- the loans back, shifting potential losses to the to a report from S&P Global

20 Asset Securitization Report November/December 2019

020_ASR1119 20 11/19/2019 8:59:37 AM Ratings. That represents nearly half of the billion subprime auto bond that priced defaults began creeping higher around company’s total managed loans. The earlier this year, Santander Consumer ver- 2007. Now, as then, the rapid defaults percentage of borrowers behind on their ified fewer than 3% of borrower incomes, may reflect borrowers who should have loans climbed to 14.50% from 13.80% a even though income verification is a criti- never received loans in the first place, said year earlier for the loans the company cal way to combat fraud. In comparison, Frank McKenna, chief fraud strategist at collects payments on, S&P said. a competitor, GM Financial, verified 68% PointPredictive. The uptick in delinquencies and de- in one of their bonds. “We’ve always drawn a link between faults may be tied to Santander Consum- Some of its struggling loans were EPDs and fraud,” McKenna said, referring er’s efforts to win more business from Fiat bundled into its main series of bonds to early payment defaults. “We found Chrysler Automobiles NV after tighten- backed by subprime auto loans. The that depending on the company, between ing its longtime financing partnership lender has had to buy back more than 30% to 70% of auto loans that default with the carmaker in July. The updated 3% of the loans it packaged into some of in the first six months have some mis- agreement, which included a one-time those bonds, according to a Bloomberg representation in the original loan file or payment of $60 million from Santander analysis of publicly available servicer application.” Consumer to Fiat Chrysler, came after the reports. Most of those repurchases were Even so, Santander Consumer’s re- carmaker’s chief financial officer had said because they defaulted early, according purchases of loans packaged into bonds last year that his company was looking at to Moody’s. That’s more than Santander highlights how investors are often insu- forming its own U.S. financing business. Consumer bought back before and higher lated from some losses on the underlying But the rising losses may also be a sign than industry standards, according to debt. The portfolio backing Santander that the weakest borrowers are having Moody’s analysts. Consumer’s asset-backed securities from growing financial trouble as economic 2018 actually performed better than deals growth shows signs of slowing. The per- Settlement Requirement from the previous two years because the centage of borrowers at least 90 days late While Santander Consumer has generally company stepped up its repurchases of on their car loans is broadly growing, ac- chosen to repurchase loans that defaulted early-payment-default loans. cording to data from the Federal Reserve early, it was required to do so in deal “The situation is somewhat perverse in Bank of New York. At the end of 2018, the documents following a settlement with that bondholders are actually benefiting number of delinquent loans exceeded 7 Massachusetts and Delaware in 2017.The from high early-payment defaults through million, the highest total in the two de- states alleged that it facilitated high-cost the repurchases,” said Moody’s analyst cades the New York Fed has kept track. loans that it knew, or should have known, Matt Scully. were not affordable for borrowers. The bonds have other protections Lowering Standards? Santander Consumer is the only sub- built into them to withstand stress. For Lenders don’t seem to be broadly prime auto asset-backed issuer that has example, the securities may be backed by tightening standards in response. About contractually made this promise. The loan extra car loans beyond the face value of 21% of new auto loans made in the first buybacks have recently ticked up. the notes issued, which can help ab- half of this year went to subprime For another series of bonds, those sorb losses from bad loans. Santander borrowers, a slight increase from last year. backed by loans to some of the riskiest Consumer is the biggest securitizer of Banks and finance companies are also subprime borrowers, Santander Consumer subprime auto loans, having sold close to making longer-term loans for cars. The had to buy back even more loans. For $70 billion of bonds backed by subprime average term reached a record high 72.9 one bond sold about a year ago, around car loans since 2007, according to data months in the second quarter for sub- 6.7% of the loans have been repurchased compiled by Bloomberg. prime new vehicle loans, according to Ex- so far, mostly in the first few months But any losses don’t just disappear: in perian. Some loan terms have increased after issuance, according to a Bloomberg the end, if there are enough, Santander to 84 months, in both prime and subprime analysis. That’s higher than average for a Consumer and bondholders can suffer. auto ABS deals. That can weaken auto- deep-subprime auto lending business, ac- “The weakening performance in the bond performance when credit conditions cording to PointPredictive, which consults managed portfolio signals elevated risks sour, according to a report from S&P. on fraud to banks and other lenders. and is overall a negative development,” There are signs that Santander said Moody’s analyst Ruomeng Cui in a Consumer in particular has eased some Defaults, Fraud telephone interview. ASR underwriting practices. For a roughly $1 During last decade’s housing bubble, early Bloomberg News

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021_ASR1119 21 11/19/2019 8:59:38 AM MBS Report

organ will make payments on the CL1 transaction to the note hold- ers based on the interest rate on the CL1 notes and principal payments are determined based on the actual principal payments received and performance of the reference pool. This differs from the CAS and STACR transactions that rely on funding sitting in a custodial account to pay interest and principal on the GSEs’ notes. “The highest rating achievable will be linked to [JPMorgan], as well as the credit enhancement required through subordination,” said Susan Hosterman, a Fitch analyst, in an interview.

The model will be able to expand the investor JPMorgan’s new program is similar to GSE credit-risk transfer programs base for the notes, plus potentially give the bank favorable capital treatment

JPMorgan’s CRT play The notes are general unsecured obligations of AA-rated JP The notes in the deal are structured to reference a pool of 979 resi- Morgan. dential mortgage loans to remain on the bank’s own books Hosterman noted that JPM- organ has active in structuring By John Hintze transactions aimed at re-invigo- rating the private RMBS market, which has remained moribund since the housing crisis in 2007 JPMorgan is turning to the credit-risk transfer being transferred to a trust. and the ensuring financial crisis. securitization model in a new $757.2 million Fitch is not rating the Class A-1R notes For example, it launched its L securitization of prime-quality residential totaling $697.6 million, but assigned ratings Street Securities credit-risk trans- mortgages that it will retain on its books. to five classes of mezzanine notes, including a fer deal in 2014, and in 2016 the According to Fitch Ratings, Chase Mort- $35.9 million Class M-1 tranche at AA. Safe Harbor CMT transactions, gage Reference Notes 2019-CL1 is Chase’s first The model will be able to expand the inves- which aimed to comply with the synthetic credit-linked note transaction, al- tor base for the notes, as well as potentially conditions set forth in the Fed- though it follows in the footsteps of two earlier give JPMorgan a way to receive favorable eral Deposit Insurance Corp.’s post-crisis deals sponsored by Chase aimed capital treatment while maintaining prime- Safe Harbor Rule. at reinvigorating the private-label residential mortgage assets on its books, according to “Some investors may not be mortgage-backed securities market. analysts. comfortable investing in [private] Chase 2019-CL1 will be structured to sell The transaction is similar to the GSE RMBS, but this allows them to notes that are tied to a reference pool of 979 credit-risk transfer platforms – Fannie Mae’s invest in RMBS collateral without residential mortgage loans – all of which will Connecticut Avenue Series and Freddie Mac’s investing in a securitization,”

ADOBE STOCK ADOBE remain on JPMorgan’s books rather than Structured Agency Credit Risk program. JPM- Hosterman said. ASR NEWS BLOOMBERG

22 Asset Securitization Report November/December 2019

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model in place, said Frater. But there is a difference; the aim of regulating what the electric company charges is so that consumers don’t get overcharged, but the goal in regulating g-fees to ensure that they don’t get under- charged, Frater said. What will not change is Fan- nie Mae’s commitment to its customers and its commitment to affordable housing, he said.

Freddie chief executive Brickman: “Outside of conservatorship, we would be able to offer much more.”

The two heads of the government-sponsored enterprises said they believe they will be able to work with the Federal Hous- Fannie and Freddie directors spoke at the MBA convention in Austin, Tex. ing Finance Agency to turn the government’s set of principles regarding housing finance reform GSEs: ‘Bring on’ competition into a plan for post-conservatorship reform. Housing finance reform could bring new entrants to the secondary “We think we have a viable market. Fannie and Freddie execs say they welcome the possibility business that private capital will be attracted to,” Brickman said. By Brad Finkelstein An early October announce- ment that Fannie Mae and Freddie Mac will be allowed to keep profits ($20 billion and $25 When it comes to possible new competitors in both companies, said Freddie CEO David billion, respecitvely) for the first the secondary market, the heads of the two Brickman. time since 2012 was seen as a current outlets said they more than welcomed “Outside of conservatorship, we would be crucial early step in reforming the possibility of additional players in their able to offer much more,” he said. the mortgage giants. space. Depending on the outcome, Freddie may But the news immediately “Bring it on,” Hugh Frater, CEO at Fannie be able to better serve affordable housing shifted focus to a bigger question Mae, declared during the Mortgage Bankers needs and innovate more once conservator- about their financial standing. Association’s annual convention in Austin, ship ends, Brickman said. Ending the “net worth sweep” Texas. “We welcome the competition, it uni- But the utility model some housing reform improves Fannie and Freddie’s formly makes things better.” commentators’ advocate for wouldn’t work, capital only in the short term. But these new players should have to oper- according to Freddie Mac’s CEO. The news had many observerses- ate under the same rules that Fannie and “We’re not the water company, we’re more timating capital needs of $100 Freddie Mac do and serve all aspects of the complicated than that,” Brickman said. and $200 billion each to be market, he added. With the regulations on guarantee fee sustainable. - with reporting from

BLOOMBERG NEWS BLOOMBERG Ending the conservatorships will benefit charges, there is already a form of the utility Hannah Lang. ASR

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023_ASR1119 23 11/19/2019 8:59:41 AM Our EXPERIENCE means you’ll have a better one.

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