Securities and Exchange Commission Chairman Jay Clayton issued a public statement October 30, 2019, seeking market input on the asset-level disclosure requirements for SEC-registered residential mortgage-backed securities (RMBS) offerings. This SEC public statement is in response to the recent housing reform plan issued by the U.S. Department of the Treasury that specifically recommended the SEC review the RMBS asset-level disclosure requirements to assess the number of required reporting fields and to clarify the defined terms for SEC-registered private label securitization issuances. The asset-level disclosure obligations that occurred as part of the 2014 revisions to the rules and amendments under the Securities Act and the Exchange Act adopted in 2004 were in direct response to the financial crisis and apply specifically to registered asset-backed securities (ABS) offerings of certain asset classes, including RMBS.
The SEC appears concerned that the asset-level disclosure obligations imposed on the issuer at the time of issuance and ongoing disclosure obligations—specifically the 270 data points required for each asset (i.e. each mortgage)—may be a contributing factor to the massive decline in SEC-registered RMBS offerings. For purposes of comparison, any RMBS offerings by Fannie Mae and Freddie Mac have approximately 100 data points for each mortgage. Of note, since the SEC issued the 2014 revisions, there has not been a single SEC-registered RMBS offering. By comparison over the same time period, Fannie Mae and Freddie Mac have issued an aggregate of approximately $4.47 trillion in RMBS.
Clearly, a number of factors have contributed to the decline in SEC-registered RMBS offering, and it appears that the SEC wants to make sure that the 2014 revisions to the ABS regulations are not the primary reason, or what may be deemed a significant contributing factor. The questions for consideration posed by the SEC and detailed below focus on “The State of the RMBS Market,” general questions surrounding “The RMBS Asset-Level Disclosure Requirements,” existing requirements, and privacy considerations of the 2-digit zip code.
The State of the RMBS Market
- Considering the state of the post-crisis RMBS market and the housing market more generally, why have there been no SEC-registered RMBS offerings since 2013?
- To what extent, if any, are the asset-level disclosure requirements adopted in 2014 a contributing factor to the lack of SEC-registered RMBS issuances?
- To what extent have other factors contributed to the absence of any SEC-registered RMBS offerings? These factors include the dominance of Freddie Mac, Fannie Mae, Ginnie Mae and other governmental entities and government-sponsored enterprises in the residential mortgage securitization market, the risk retention requirements, and/or other filing requirements for registration.
The RMBS Asset-Level Disclosure Requirements
- Have circumstances in the RMBS market changed since both the lead-up to the 2008 financial crisis and the adoption of the rule revisions in 2014? If so, how?
- In light of any such changes in the market, should the asset-level disclosure requirements adopted in 2014 be reconsidered?
- Should the asset-level disclosure requirements be conformed to the practices of private-label RMBS issuers offering securities in the Rule 144A exempt markets?
- Recognizing that there are differences in the structure of the securities being offered and the nature of the markets, how should the SEC consider the asset-level disclosures provided in RMBS offerings by Fannie Mae and Freddie Mac?
- Are there other standards that should be considered as benchmarks for RMBS asset-level disclosure requirements? If so, which ones and why? For example, should one or more asset-level data points be revised to better align with MISMO standards? If so, how should they be revised and why?
Request for Feedback on Existing Requirements
- Should one or more data points be revised? If so, which specific data points should be revised and why?
- Should any data points be eliminated? If so, why? Does the SEC’s rationale for adopting certain data points articulated in the 2014 Adopting Release remain valid in today’s market? Should the revision or elimination of certain data points be time related? For example, should the SEC identify a set of data points that could be eliminated or subject to a “provide-or-explain” process after the asset has been outstanding for more than one year, is performing, and has not been non-performing since origination?
- Would the elimination of any of the data points be reasonably expected to adversely affect investors’ ability to analyze the quality and performance of the underlying assets? If so, which specific data points should be retained and why?
- Are there any specific data points that are unclear or confusing? If so, how should they be revised? Is there any interpretive guidance that the SEC or staff could provide to help clarify these issues?
- Are the responses to these questions different for the data provided in initial filings at the time of the offering versus the data provided in ongoing filings (i.e., at the time of filing each Form 10-D)?
Available Asset-Level Data and Individual Privacy Concerns
One of the data points the SEC rules require is the 2-digit zip code for the mortgaged property. The SEC adopted the 2-digit zip code requirement in an attempt to give investors the ability to assess specific market risk while respecting the prohibition on disclosure of Non-Public Personal Information.
- Are issuers foregoing SEC-registered RMBS offerings because they are unable to provide more granular zip code information to investors due to privacy concerns that such information would be made publicly available on EDGAR (the Electronic Data Gathering, Analysis, and Retrieval database)?
- What level of geographic information do investors believe is necessary to perform adequate risk and return analysis on the underlying assets and the securities offered? What level of geographic information do investors receive in unregistered transactions? Is this level of information sufficient to ensure that investors receive all asset level information that would reasonably be expected to affect an investment decision in the securities offered?
- Are there alternative ways to present this information that would minimize re-identification risk yet still satisfy investors’ needs, such as using other geographic indicators or providing aggregated data or ranges? If so, how should the data be aggregated? And why would those groupings or ranges be appropriate?
Our Mortgage Banking Group looks forward to working with our clients to provide meaningful feedback that may assist the SEC in assessing the potential for any enhancements to the 2014 revisions to the rules and amendments under the Securities Act and the Exchange Act adopted in 2004.