As the recovering U.S. asset-backed market heads toward the new year, concerns remain that overregulation may deliver a setback to a full recovery.
Analysts agree the challenge will be to strike the right balance when it comes to securitization oversight and rules.
The biggest risks to the sector in 2010 are regulatory and legislative. Given the mantra of consumer protection in Washington, there is a significant risk of overregulation occurring, with negative ramifications for consumer ABS performance, said Joseph Astorina, analyst at Barclays Capital.
The changing securitization landscape will include new accounting rules that require off balance sheet transactions to be moved back onto a lender's books. The move is seen boosting a bank's leverage and leading to increased capital requirements.
Accounting changes that are going into effect will increase assets and liabilities on a bank's balance sheet, versus off balance sheet, and that's going to increase leverage, said James Grady, portfolio manager at Deutsche Asset Management.
Issuance in the asset-backed market is seen remaining flat to a bit lower from 2009's $135 billion level, sold with the help of the Federal Reserve's emergency loan program, as issuers seek other funding alternatives, while others opt to make less loans.
Our takeaway is that the hurdles are not insurmountable for the securitization market, but issuers will face higher regulatory costs. These costs may be passed through to borrowers, both consumers and corporate, in the form of higher credit costs and diminished credit availability, said JP Morgan Securities in a recent report.
Issuers would also be required to retain at least 5 percent of performance risk in loans they securitize under an Obama administration plan.
The drive by Congress and the Federal Deposit Insurance Corp. to place new requirements on ABS issuers could hamper securitization if not done thoughtfully, said Astorina.
Analysts said with about $100 billion of credit card securities slated to mature in 2010, issuers are likely to turn to other markets to refinance the debt.
We do have a bunch of credit card ABS maturing in the coming year and the expectation is that not all of it will be refinanced in the securitized markets, given where some banks can finance in the unsecured market, or their deposit base, said Grady.
(Editing by Leslie Adler)