Posts Tagged ‘EDGAR’

Anticipating Market Trends and Their Implications

Monday, September 20th, 2010

By Mark P. Dangelo

Innovative Relevance®

There is still much to be gloomy about across many segments within the U.S.A. — economy, housing, and finance to name just a few.  It appears as though many of the ill-conceived ideas and financial innovations that propelled a decade of prosperity are now contributing to high levels of sustained unemployment, regulatory burdens, and historic deficits. 

Looking forward, the next 15 months will still hold a vast amount of uncertainty and risk along with a substantial amount of political theatre.  Yet, does that mean we do nothing or very little to prepare for the market events and consumer dynamics unfolding all around us?  Is the new BAU really a retro BAU as some have projected?

Positively, indications from dozens of industry leaders point to converging themes and series of actions – although the transparency of these trends still has not been fully revealed.  However, as clarity is achieved, nearly every organization can benefit from these solidifying trends during the remainder of 2010 and into 2011. 

Yet, the evolving trends require the selective integration of financial processes across the spectrum of origination, servicing, and capital markets.  No single idea or pure-play event is on the horizon to ensure that market intricacy is wrapped up in a plug-and-play offering or one-stop vendor solution.  Such a rudimentary belief system is what materially contributed to misinterpreting systemic risks and creating unsustainable mortgage and finance models.

But trends are funny things and their advantages often multi-faceted.  Let us examine just three of the most interesting and misunderstood.

Economic Reality

For an industry, now at one-third its 2007 size, is there life after a three year gutting of businesses and skills?  Have we reached the bottom and market capitulation?  Can technology be of any use, in a market that will be stagnant for the next 3 to 5 years, beyond efficiencies or traditional process improvements?

First, and to be very blunt, economic theory and those who practice it have demonstrated that their models, forecasts, and suppositions are not good predictors of future reality and the complexity of today’s financial markets.  Moving forward, the discipline and rigor of economics will be called into question, resulting in organizations increasing their own business intelligence capabilities in an effort to control and predict future outcomes, risks, and liabilities.  As some economists have indicated, economic disciplines need to undergo a rigorous self-examination if they are to regain public trust.

This void of confidence has spawned an unintended consequence.  It has created a demand for internally vetted intelligence and predictive technology across several primary data taxonomies – consumer channels and behaviors, regulatory compliance, and (bespoke) markets directly linked to dependent products.  Analytics will tie many of the interrelated entities and elements together via multi-dimensional or layered dashboards. 

Since data volumes are doubling every 18 months across the enterprise, and supported by increased access to sophisticated mining tools, it is easy to understand why budgets surrounding the need for intelligence needs are projected to grow at over 25% per year. 

The provisioning needed to support these management defined requirements is also changing.  Considering a backdrop of nearly 10% unemployment now projected until 2012, while facing a hostile consumer base, offshore outsourcing for these knowledge process areas may have reached its peak.   The mix of how to deliver intelligence (e.g., operational, competitive, consumer, financial, regulatory, risks, et al) to the organization has likely been permanently altered to concentrate on inward confidence.

Capital Markets

Capital markets are being reformed to deliver sustainable ABS products spurred on by pending SEC revisions, EC Article 122a, Basel III, and the clearing of derivatives with the Dodd-Frank regulations. 

The need for resurgence of the private ABS market, standing at just over 40% or $350 billion of their 2007, size is clear.  Without liquid and transparent private capital markets, lending cannot be sustained simply by increasing deposit base or via government guarantees.  In addition, the demand and importance of straight-through processing (leading directly into the capital instruments themselves) with rigorous data integrity and standards cannot be underestimated. 

Originators who design their loan processing and vetting from the start with private capital markets as the recipient, will benefit with improved basis point margins, reduced risks, and ensured regulatory compliance (e.g., as proposed for updated EDGAR filings surrounding REG AB revisions). 

Why is this important now?  Just ask RBS with their issuance of $4.7 billion in MBS’s last week, or banks across the globe, as they rapidly staff for an anticipated rebirth of the private ABS and MBS markets. 

Yes, the first iteration of securitization is dead – killed by easy money, lax lending, speculation, and complex, derivative injected, layered securities.  A second iteration has already begun for private ABS as demonstrated by the new market leaders like J.P. Morgan. 

This trend will accelerate in 2011 spurred on by pending dispositions of the GSE’s.  Without a functioning private securitization market, the workouts for the struggling GSE’s will never be politically achieved – nor financially sustainable.

Security

As noted by Maslow back in 1943, security and safety is principal to acceptable human behavior.  This need is transferable into the demand by customers and consumers to be confident, absolutely confident, that the most private information, scores, ratings, and profiles are 100% secure. 

Whereas data storage protection has increased markedly over the last three years, it is the vulnerability of the networks that is gaining increased importance and scrutiny.  Examples of this include HP’s recent acquisition of ArcSight and Intel’s acquisition of McAfee – all at very significant premiums to market valuations. 

This increased focus on the network and accessibility has been a direct result of mobile proliferation and sophistication of devices (e.g., iPad, BlackBerry, tablet computers).  This changing technology-induced behavior has resulted in a complex layering of network points of entry and protections not just for consumer applications, but for enterprise offerings which start at the consumer and touching brokers, agents, loan officers, appraisers, vendors, servicers, and loss mitigation specialists. 

To back up this trend is a one-third increase in budgets projected for FSI organizations specifically targeting network and mobile security over the next year alone.  Factor in regulatory and compliance demands for data – from its originating source to its eventual disposal – and the budgetary impacts are even greater. 

Analogous to the securitization markets being reset (i.e., waiting for “Securitization 2.0”), security is about to take a series of new twists and turns that will govern the next decade of IT skills, business offerings, and consumer protection. 

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What is very clear is the dichotomy of beliefs and value systems that still must be reconciled in the face of polarized consumers and regulatory vigor.  Stated another way, each market participant believes that the “new normal” will be similar to their accepted models of operation. 

Still, trends frequently mutate as a result of market results and consumer behavior, while spinning a story – or a nightmare – regardless of principles and theories put in place to anticipate them or explain them away. 

As noted recently in the Financial Times, the demand for housing by the consumer actually peaked six years before the market correction regarding ownership rates and housing prices.  Yet, transactional technology focused on a need for greater scale and throughput dominated the industry and their back-office operations. 

It is not atypical for market actions to be out-of-phase against the trends.  Frequently trends were left unnoticed or discarded due to the fact they did not meet the expectations of those who needed to listen. 

It is human nature to dismiss contradictory data when it is outside our traditional models.  It is easy to dismiss ideas with foreign words or rebuke the trends as irrelevant because they appear foreign – beyond traditional understanding.  Retrospectively, hasn’t that already been tried, and failed?

Regardless of beliefs – change will happen and retro Luddites will fail.  So, who will be listening or adapting to market, consumer, and financial trends?  Who will fail to recognize the signals too late – when the end is near?  Who will heed the calls and profit from change? 

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ABS – Are YOU Prepared for a Revised Regulation AB?

Monday, July 19th, 2010

By Mark P. Dangelo

www.Innovative-Relevance.com

 

Lenders want to lend.  Consumers want to buy.  Investors want to invest.  Governments want tax revenue and GDP growth.  Politicians and their appointees, let’s face it, want politics.

Generically, it sounds very familiar, pro-consumption, and mainstream capitalistic.  Historically, when put into practice across the financial services supply chain, it has been the growth formula for developed countries since the end of World War II.  That is at least until March 2008, when “financial engineering” designed to mitigate risks exposed systemic, seismic regulatory shocks that erased over $20 trillion in global wealth, while simultaneously increasing sovereign debts. 

Now, with financial reform passed, many assume that the vast uncertainties surrounding markets, assets, and corporations should close a chaotic chapter in our historical timelines.  But what about pending updates to existing regulations?  Weren’t they “closed out” as well? 

As the summer brings reflection, let us examine the backdrop for the proposed Regulation AB (REG AB) revisions, the rationale for REG AB, and a brief review of the extensive changes out for comment.  Oh, by the way, the short answer is no, there are many more regulatory “adjustments” still in the works.

The Stage for REG AB Revisions

It is quite possible, if not highly probable, that the U.S. economic outlook will languish for at least another two years.  With high unemployment stoking a steady stream of public and private loss mitigation actions, published and stealth home inventories will rise, as real household incomes will potentially stagnate and potentially drop for over 90% of the population.  At the risk of upsetting the optimists and those longing for a return to the good-old days, the freewheeling, frivolous consumer of old is dead.

The once stoic trophy of household debt funded by rising real estate prices is now replaced with disillusionment and reduction.  The lemming investments of “me-too,” which created the largest loss of capital in history, have been replaced with a government of business as usual — all underpinned by securitized assets “guaranteed” by entities in receivership. 

True, the markets and the consumer are improving – but that improvement is hardly robust and not assured.  The Fed is once-again nervous, the markets are manic-depressive, and the consumers and homeowners are still seeking hope.  The omnipotent economy has improved from its worst – but will it last or is it even architected for sustainability?  What a difference an economic quarter makes.

It was early in the second quarter of 2010, against the prospect of a more promising future, the SEC released, “… significant revisions to Regulation AB and other rules regarding the offering process, disclosure and reporting for asset-backed securities.”  Spanning 667 pages, the implications of these proposed changes are far reaching and their compliance using new information captured within a repurposed EDGAR will have a pronounced impact on operating processes and business models for years to come.

REG AB Rationale

Come August 2, 2010, the comment period surrounding the proposed revisions to numerous 17 CFR (code of federal regulations) parts and sections will end.  It is anticipated on that by the end of 2010, some form of these new revisions and demands for private securitization (i.e., ABS, asset backed securities) will be made law. 

Pushing aside politics and headlines, without the creation of new ABS issues and markets comprised of transparent and liquid asset-backed private securitizations, mortgage banking and real estate will potentially languish for another decade.  Without faith in quality, non-government guaranteed ABS instruments, investors will continue to refocus their investment monies elsewhere.

But will these regulatory revisions succeed?  What will be the net burden and ROI?  Has the SEC with the REG AB changes articulated a critical set of enablers needed to entice investors to open their strategies to more than government-backed assets?

For those who remember, REG AB was first approved back in January 2005.  Now with the lingering crisis two years old, the SEC in their REG AB revisions states, “These proposals are designed to improve investor protection and promote more efficient asset-backed markets.”

Let’s take a cursory examination of the 667 pages of disclosures, new rules, eligibility, obligations, reports, and officer certifications.  

Parts, Sections, and Paragraphs

What stands out in the revisions first and foremost are the data fields proposed for RMBS’s and the new use of EDGAR for source code submission of cash waterfall projections. 

Regarding RMBS, the revisions declares, “We are proposing 137 data points for ABS backed by residential mortgages. The staff has surveyed the data and definitions provided by the organizations … to require additional data fields … on information already typically provided by sellers to Fannie Mae and Freddie Mac or likely to be collected by participants in Project RESTART.”  With additional mentions of the OCC, OTS, MERS, and MISMO, the data field specifics are described in detail starting in Table 2 and running for 30 pages.

Regarding the use of EDGAR, two statements within the SEC revisions stand out.  First, “Because we believe that asset-level data should be provided to investors and all market participants in a form that facilitates data analysis, we are also proposing to require that asset-level data be filed on EDGAR in XML format.” 

This statement goes beyond the initial filing and may include the need for updated information to ensure timeliness of information within mandatory periodic reports.  Or as stated in the SEC revision document, “We are proposing 151 data points for periodic reports for ABS backed by residential mortgages.”

Secondly, EDGAR of the future may be importing waterfall cash projections for RMBS issues in Python.  “Under the proposed requirement, the filed source code, when downloaded and run by an investor, must provide the user with the ability to programmatically input the user’s own assumptions regarding the future performance and cash flows from the pool assets, including but not limited to assumptions about future interest rates, default rates, prepayment speeds, loss-given-default rates, and any other necessary assumptions … The waterfall computer program must also allow the use of the proposed asset-level data file that will be filed at the time of the offering and on a periodic basis thereafter.”

The complexities and implications of the revisions are numerous, and it is more than likely an organization will require specialized legal guidance to navigate the regulation in its final form.  However, what is apparent already is that an entire new class of technologies, analytics, and value-added services will spring from these revisions – at the same time taking current proprietary information solutions and offerings into the public domain. 

As stated several years ago in this column, the reverse financial supply chain is now gaining increased efficacy — when contrasted to the historical forward approach.  Profitable survivability for private ABS issuers and those supplying mortgage assets appears to be dependent on the ability to navigate from the investor requirements back into the consumer.

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Yes, it is true.  None of us like regulations or the compliance mandates that follow them into practice.  But, out of all the market concerns and anxieties that the government has gone awry, will anyone be willing to tackle the disposition of the GSE’s absent a private and functioning ABS marketplace?  

Are we just hoping that any GSE remediation’s post midterms won’t bring the lending markets to a complete standstill once again?  Without new, private ABS issues, especially in CMBS and RMBS, where will the liquidity come from for lending to consumer and corporate customers?

So, if we don’t like the proposed revisions, our window of response to the SEC’s comment period is rapidly closing.  In their defense, this regulator is asking for feedback on a lot of questions and potential market concerns. 

In the end, it appears, our organizations’ need to be prepared for new process, technology, analytical, and procedural requirements before 2011 arrives — as some form of an updated REG AB will be likely issued.

 

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