The Modest Proposal for PLS Reform

Redwood Trust calls for Bond RegistryThree years ago Redwood recommended a series of reforms for the Private Label RMBS market. And earlier this year, Redwood reported optimism and progress with the pace of activity in the sector:

“Volume in the private-label securitization market in the first quarter exceeded most people’s expectations, and we’re hoping for additional activity in the second quarter,” [President & CFO Christopher J.] Abate said during a recent conference call in the context of a discussion of Redwood Trust’s investments in the subordinate pieces of the Sequoia deals and third-party RMBS.

Redwood Trust executives reported that the average number of outside investors in the AAA-rated tranches of Sequoia securitizations had more than doubled since early 2014, which they described as “a good sign for the market.” U.S. insurance companies were among those purchasing pieces of the three 2016 Sequoia deals. The actual cost of aggregate purchases by property and casualty and life insurers during the calendar year exceeded $193 million, with units of Pacific Mutual Holding Co. responsible for more than $63 million of that amount.”

Among other reforms, Redwood had called for the establishment of a bond registry to facilitate communications:

“Establish a Bond Registry to Facilitate Security Holder Communication 

  • Develop a centralized clearinghouse or bond registry to enable security holders to locate and contact each other and take collective action when necessary. 
  • The Depository Trust Company (“DTC”) could expand its role as bond registrar and create the capability for investors to contact each other.”

Though not implemented via DTC, such a registry has already made a big impact in the Student Loan ABS market via our platform: DealVector. In the SLABS market the DealVector platform allowed several hundred institutional holders to work with the two largest issuers to execute amendments that would have otherwise been almost impossible. Thresholds of 100% required the coordination of every single holder of particular bonds. In the end, nearly $50 billion in amendments met this high hurdle.

With this year’s uptick in private label RMBS, is it time to reinvigorate the calls for reform that might improve liquidity and avoid the next crisis? Let’s keep the momentum going from ABS to RMBS!