Second, such a collaborative effortrnwould demonstrate the structural reforms necessary to attract those senior bondrninvestors who said they would never return to the market without sufficientrnprotections, setting a de facto industry standard and giving subsequent transactionsrna pattern to follow.   </p

Third, unlike regulation orrnlegislation, a benchmark transaction would leave room for innovation andrnevolution while grounding the market in a simple, transparent standard.  This could catalyze issuance and liquidity inrnthe here and now. </p

Stegman sees such a transaction establishingrna model set of documents and terms, providing issuers with reduced operationalrnand legal costs while retaining the ability to deviate from the standard byrnblacklining term differences. Investors would be able to conduct due diligencernmore efficiently. </p

The risk-reward profiles of sectorsrnsuch as agency mortgage-backed securities (MBS) are more attractive torninvestors today than AAA PLS even though the latter offers wider spreads.  Without needed reforms investors simply dornnot feel adequately compensated for the risk.  A benchmark transactionrnwith improved investor protections, Stegman said, would reverse this perceptionrneven though those protections come with costs and such a transaction will notrnhappen unless the economics work. </p

Even if investors and issuers agreernto sit down and work together to develop a market standard it might now be easyrnto reconcile their often conflicting interests.  The small deals that currently come to marketrndiffer markedly despite the homogeneity and singular quality of the collateralrnlargely because of a lack of willingness on the part of some issuers to concedernto a common standard.   They are “structuringrndeals to the current size of the market rather than adopting the reforms requiredrnto expand the investor base,” Stegman said.</p

He reminded stakeholders that marketrnconditions will not always favor the retention of whole loans on balance sheet.rn The curve has flattened by over 80 basisrnpoints since the beginning of the year, and if this continues banks will findrnit increasingly unattractive to grow their portfolio investments in mortgagernloans.  rn</p

Regulators and policymakers havernlittle direct control over the shape of the yield curve but they do continue tornplay a significant role in housing finance and thus the scope of the PLSrnmarket.  It is often suggested by stakeholdersrnthat government lower conforming loan limits, thus reducing the market share ofrnthe government sponsored enterprises which would catalyze the PLS market byrnincreasing supply and improving liquidity.  .</p

But Stegman said this is contrary tornthe Administration’s other goal of providing access to mortgage credit to allrnqualified borrowers.  Prematurelyrnreducing loan limits without first putting reforms in place to attract privaterncapital could unbalance the market leading to lower credit access and higher borrowerrncosts.  This would hurt the health of thernhousing market</p

Reducing the loan limits makes sensernfrom a liquidity standpoint Steadman said. rnBut his discussions with institutional investors have convinced him thatrnliquidity alone is not a sufficient condition for their broad-scale return tornthe non-agency market.  A benchmarkrntransaction would offer concrete evidence of the private sectors ability tornprovide mortgage credit at competitive rates and would support the argument thatrnreducing the government’s footprint can be achieved without undesirable resultsrnfor consumers.</p

Thernsignificant structural flaws brought to light by the financial crisis included misalignedrnincentives, ineffective enforcement mechanisms, weak or no oversight ofrntransaction parties, and lack of transparency and without remedies to these thernPLS market will not return at scale.  A “GreenrnPaper” published earlier this week by SFIG sets out a second set of emergingrnconsensus industry standards, a so-called RMBS 3.0. rn</p

RMBS 3.0 focuses on best practicesrnfor representations and warranties, repurchase governance, and otherrnenforcement mechanisms; due diligence, disclosure and data issues; and rolesrnand responsibilities of transaction parties and their communications with investors.rn</p

Stegman said standards cannot workrnin isolation but a benchmark transaction could serve as a “road test” for thernconsensus terms achieved to date.  “Whilerna benchmark transaction would help catalyze the market today, the ongoing RMBSrn3.0 effort can form the basis for future oversight to ensure that itsrnstill-evolving standards are not watered down over time.”</p

Stegman used the Securities and ExchangernCommission’s (SEC’s) revisions to Regulation AB as another example of thernutility of a benchmark transaction.  First,rnit could help expand the Regulation, which only applies to publicly registeredrnofferings by making the rule’s critical reforms a best practice for 144Arnprivate placement offerings which is where most PLS transactions are occurring today.rn</p

Regulation AB II also seeks tornaddress repurchase obligations by requiring for shelf registration anrnindependent third party review of loans for compliance with representations andrnwarranties upon the occurrence of a two-pronged trigger, including a pool-levelrndelinquency threshold and an investor vote. rnStegman said he agrees with RMBS 3.0 which sets out loan-level inrnaddition to pool-level delinquency triggers. rnHe also suggests the reviewer recommend to the trustee if the repurchasernobligation should be enforced based on the review and that deal documentsrndirect the trustee to enforce the repurchase obligation on the reviewer’srnrecommendation – without need for an investor vote. </p