June10,2011 TheHonorableSheilaC.Bair Chairman FederalDepositInsuranceCorporation 55017thStreet,NW Washington,DC20429 EdwardJ.Demarco ActingDirector,FederalHousingFinanceAgency FourthFloor 1700GStreet,NW Washington,DC20552 TheHonorableBenS.

.Bernanke Chairman,BoardofGovernors FederalReserveSystem 20thStreetandConstitutionAvenue,NW Washington,DC20551 TheHonorableShaunDonovan Secretary DepartmentofHousingandUrban Development 4517thStreet,SW Room10276
Washington,DC204100500.
JohnG.Walsh ActingComptrolleroftheCurrency DepartmentoftheTreasury 250EStreet,SW Washington,DC20219

TheHonorableMaryL.Schapiro Chairman SecuritiesandExchangeCommission 100FStreet,NE Washington,DC20549 RE: CreditRiskRetentionProposedRule

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DearSirorMadam: TheAssetManagementGroup(theAMG)oftheSecuritiesIndustryandFinancial
MarketsAssociation(SIFMA)1appreciatestheopportunitytoprovidecommentsonthe

SIFMAbringstogetherthesharedinterestsofhundredsofsecuritiesfirms,banksandassetmanagers. SIFMA'smissionistopromotepoliciesandpracticesthatstrengthenmarketsandencouragecapital availability,jobcreationandeconomicgrowthwhilebuildingtrustandconfidenceinthefinancialindustry. ThisletterhasbeenpreparedbytheAssetManagementGroup(theAMG)ofSIFMA,thevoiceforthe buysidewithinthesecuritiesindustryandthebroaderfinancialmarkets.Collectively,themembersofthe AMGrepresentover$20trillionofassetsundermanagement.TheclientsofAMGmemberfirmsinclude, amongothers,registeredinvestmentcompanies,stateandlocalgovernmentpensionfunds,universities, 401(k)plans,andsimilartypesofretirementfundsandprivatefunds,suchashedgefundsandprivate equityfunds.

New York|Washington 120Broadway,35thFloor |NewYork,NY102710080|P:212.313.1200|F:212.313.1301
1

www.sifma.org|www.investedinamerica.org

 proposedruleissuedbytheSecuritiesandExchangeCommission,theTreasuryDepartment, theBoardofGovernorsoftheFederalReserve,andotheragencies(theAgencies),regarding creditriskretentionwhenissuingassetbackedsecurities.Section941oftheDoddFrankWall StreetReformandConsumerProtectionAct(theAct)requirestheAgenciestoprescribe regulationstorequireasecuritizertoretainaneconomicinterestinaportionofthecreditriskfor anyassetthatthesecuritizer,throughtheissuanceofanassetbackedsecurity,transfers,sells, orconveystoathirdparty.Theregulationsmustrequiretheretentionofatleast5%ofthe creditriskforassetsotherthanthosesubjecttoanexemptionorexception(suchasforqualified residentialmortgages,orQRMs).TheAgenciespublisheditsproposedCreditRiskRetention regulations(theProposal)onApril29,2011. Americanandglobalsecuritizationmarketparticipantsareeagertoengageinavibrant, reinvigoratedprivatesecuritizationmarketthatisaviablealternativeorsupplementtothe governmentguaranteedsecuritizationmarket.Webelievethatthegoverningprinciple underlyingtheProposalthealignmentofeconomicinterestsbetweenassetsecuritizersand investorsthroughriskretentionisacriticalsteptotherobustreturnoftheprivatesecuritization market.Ahealthyriskretentionrequirement,withonlynarrowlyconstruedexemptionssuchas forqualifiedresidentialmortgages(QRMs),alsofurtherstheintentofCongresstocreatea goldstandardforprudentunderwriting.Accordingly,aswedetailbelow,webelievethe exemptionstoriskretentionshouldbenarrow,theriskretainedbythesecuritizershouldnotbe materiallydiluted,andthetypesandfeaturesofriskretentionshouldaccuratelyreflectthe economicsofthemarketplace. WeappreciatethechallengeofconsideringtheProposalwithoutregardtotheoverall conditionofthecapitalmarketsforresidentialhousingfinanceriskretentioninsecuritizations isapieceofamuchlargerpuzzle.Therepresentlyisvirtuallynoprivatesecuritizationmarket. Thegovernmentsponsoredenterprises(theGSEs)areinconservatorship,theirfutureis uncertain,andtheyarenarrowingtheirpurchasecriteriaandincreasingtheirguarantyfees.Yet FannieMaeandFreddieMac(alongwithGinnieMae)stillrepresentanunprecedentedshareof themarket.Althoughmanyagreethattheiroversizedroleshouldbecarefullyconstrainedand reduced,itislikelythatsomeformoftheProposalwillbefinalizedbeforetheultimatefateofthe GSEsisresolved.Thenaturalconsequenceisthatneithertheprivateinvestorcommunity,the GSEs,norpublicpolicymakerswillbeabletodevelopanintegratedapproachtothereformof thecapitalmarketsthatwillencouragethereturnofprivateinvestors. SIFMAsAMGhasbeeninfrequentcontactwiththosepolicymakersthosein Congress,withintheTreasuryDepartment,andatotherfinancialregulatoryagencies providingimportantinputtohelpdefinethefutureinfrastructureofmortgagefinance.Thereare asmanyeconomicpredictionsabouttheprognosisforthereturnofprivatesecuritizationsas therearetheoriesforresolving theGSEs.Thereissimplynowaytoknowexactlytheimpacton theavailabilityandaffordabilityof residentialmortgageloansif,forexample,theGSEswrap aroundthemarket(throughtheirguaranteesthataresupportedbytheU.S.Treasury)were removedorsignificantlyreduced.Similarly,thereisnowaytopredictexactlytheimpactof requiringriskretentiononmortgageloansotherthanQRMsthatwouldbesubjecttothe fulsomeunderwritingrequirementsintheProposal.Perhapsmostimportantly,itisstillunclear howtheharmonizationofriskretentionandtheresolutionofGSEswillaffecttheTBAmarket. AMGstronglysuggeststhattheAgenciestakeintoaccounttheeffectontheTBAmarketwhen deciding onthefinalversionof therule. Nevertheless,theAgenciesarepresentlytaskedwithimplementingonefacetofthat reformtheActsrisk retentionrequirementsandtheboundariesoftheQRMexemption. Asa

 thresholdissue,AMGgenerallybelievesthatatsomepricethemarketwillparticipateinloans thatrequireriskretention(i.e.,nonQRMs),althoughintheabsenceofagovernmentguarantee itispossiblethatsomeofthemarketwillnotparticipateatanyprice.Thereisaninvestor appetiteforqualityassetsatattractiveyields.Thatappetitewillbesupportedbyexemptions fromriskretentionthataredrawnnarrowlyandclearly.First,creatingasolidQRMexemption fromriskretentionwillinstilldisciplinedunderwritingatorigination,whichwillsupportthemarket forgoldstandardloans.Inaddition,itwillcreateaclearbenchmarkforunderstandingand pricingnonQRMsecuritizations.Webelievethealignmentofeconomicinterestsandthe originationdisciplinethatwillbefosteredbyriskretentionwillfacilitatethereturnofprivate investorstothemarket.Publicpolicy,andtheAgencies,shouldencouragesuchareturn. Inprovidingthecommentsbelow,wenotethattheunderlyingpolicyrationaleofrisk retentionnamely,theneedtoalignincentivestoproducequalityloansthroughrisksharing applieswithequalforceregardlessoftheassetclasses.Themethodsofachievingthese objectives,however,needtoaccountfortheuniquefeaturesofdifferentassetclasses,which somebelievemayrequiredifferentriskretentionprovisions.Ourcommentsbelowprimarily relatetotheresidentialmortgagebackedsecuritiesmarket.Wethinkcertainofthepointsare applicabletootherassetclasses,butsomearenot.Forexample,securitiesbackedby commercialmortgages(CMBS)createsignificantlydifferentissuesrelatedtoriskretentionthan thosebackedbyresidentialmortgagesand,asaresult,shouldbeconsideredseparately. I. APPLICABILITYOFRISKRETENTIONREQUIREMENTS A. ExemptionforQualifiedResidentialMortgages

TheAgenciesrecognizethebalancebetweentheconstructionofQRMandthe availabilityandcostofmortgagecredit.SettingtheQRMthresholdsconservativelymayresult inthehighercostsofriskretentionforalargersetofnonQRMsbeingpassedontoborrowers. However,settingconservativethresholds,suchthatQRMrepresentstheclearandcertaingold standardformortgageloanunderwriting,maycreateasturdier,healthier,andmoreliquid secondarymarketfornonQRMs,whichcouldresultindownwardpressureoncostsand supportavailability;ofcourse,nooneknowsforsurewhattheimpactwillbe.Asdiscussed above,theseresultsheavilydependontheuncertainfutureofgovernmentsupportofalarge portionofthemarket. Whiletherearemanyunknowns,onthequestionofthescopeofQRM,AMGsupports theProposalsestablishmentofanarrowexemptionfromtheriskretentionrequirement.Astrict constructionoftheQRMexemptionisnotaprohibitiononnonQRMs,althoughriskretentionfor nonQRMswillaffectthecostsandavailabilityofaffordableresidentialmortgagecreditforthose borrowers.Nonetheless,AMGbelievesthattheProposalsdefinitionsofQRMareareasonable startingpointandgenerallyreflectasetofloansforwhichhistoricaldatashowthattheriskof defaultissignificantlylower.Withtheexceptionoftheservicingstandards,asdiscussedbelow, theQRMparametersandtherulesonriskretentionlargelyareappropriate,sothattherewillbe abalancebetweencorrectlyalignedincentivesforsecuritizers(andoriginators)andthe availabilityofmortgageloanstononQRMhomebuyersandrefinancers. Weappreciatetheconcernsaboutaccesstoaffordablecredit,butweurgetheAgencies toresistencouragingareturntothelooseunderwritingofthenonconformingmortgagespace duringthemortgagecreditbubble.Thepresenceofriskretentionwillprovideadisciplining effectonthatsegmentofthemortgagemarket.

 1. ExclusionfromQRMforNontraditionalLoanTypes

TheProposalwouldprovidethatQRMscouldnotincludeloanswithcertain nontraditionalrepaymentterms.TheProposalwouldprohibitQRMsfromhaving,amongother features,repaymenttermsthatincludeinterestonlypayments,negativeamortization,orballoon payments.Inaddition,aQRMmayhaveafixedoradjustablerate,buttherulewouldlimitthe amountbywhichadjustableinterestratesmayincrease.TheProposalalsowouldprohibita QRMfromhavingaprepaymentpenalty. AMGstronglysupportsthesecriteriaforQRMs.Asmentionedabove,AMGisconfident thatdefiningQRMstoexcludecertainnontraditionalloantypeswillnotresultinanundue restrictionofaffordablemortgagecredit. 2. QuantitativeUnderwritingFormulasandDownPaymentRequirement

TheProposalalsoestablishesclear,brightlineformulasforQRMunderwritingratios. Asabove,AMGbelievesrelyinguponthoseratioslargelyresultsinmortgageloanswitha significantlylowerriskofdefault.Evenmoreimportantly,however,AMGstronglysupportsthe useofclearandobjectivestandardsthatpromotecertaintyincomplianceandexecution.While theAgenciesarelikelytoreceivemanycommentsontheproposedratiovaluesthemselves,itis criticallyimportantforsecuritizersandinvestorstohavecertaintyattheoutsetthataparticular loanmeetsordoesnotmeettheQRMstandards.Inthatsense,AMGmembersaremost concernedthattheratios,onceproperlyset,beinviolable. ItmaybebeneficialfortheAgenciestoestablishamechanismforrevisingtheratiosin thefuture,if(forexample)taxratesweretobesignificantlyrevised,orunusualinflationis experiencedincertainsectors.Whileweagreethatsettingthoseratiosattheappropriatelevel, andresettingthemasnecessary,isimportant,theobjectivenessandcertaintyofestablished underwritingratiosisrequiredtofacilitatetheproperfunctioningoftheresidentialmortgage backedsecurities(RMBS)markets. TheProposalalsoincludesastrictrequirementfora20%downpayment,requiringthat consumersbringcash(includingintheformofgiftsundercertaincircumstances)tocoverthe transactionsclosingcosts;20%ofthelesserofthepropertysestimatedmarketvalueorthe purchaseprice;andiftheestimatedvalueislowerthanthepurchaseprice,thedifference betweenthoseamounts.Weunderstandthatthisproposaliscontroversial,andthatmany believetheAgenciesshouldallowaconsiderationofprivatemortgageinsurance.Whilesome arguethebenefitsof,forexample,allowingaQRMtorequireasmallerdownpaymentalong withprivatemortgageinsurance,westronglysupportasignificantdownpaymentrequirement. Notonlyisthe20%downpaymentrequirementclear,objective,andrelativelyeasyto implement,AMGbelievesthatitrepresentsanimportantfactorindeterminingwhethertheloan willresultindefault.Theborrowersequitycommitmentalignsthepartiesinterestsandcannot besubstitutedbyasuretyprovidedbyanoutsideinsurer;infact,thepresenceofthemortgage insuranceinferstheweaknessoftheborrowersprimaryinvestment. Inaddition,mortgageinsurershave,likemanyinthemortgageindustry,suffered tremendouslyduringtherecentrecession.Anyallowanceforprivatemortgageinsuranceto replaceasoliddownpaymentrequirementwouldnecessarilyentailacreditratingmeasurement oftheinsurers.Aswithourconcernexpressedbelowaboutallowingoriginatorstosharesome oftheriskretentionburdenincertaincircumstances,AMGbelievesthatallowingmortgage insurancetoreplaceaportionoftheconsumersinterestinthetransactionwouldleadto

 complexityanduncertainty,andincreases(ratherthandiminishes)systemrisk.AMGbelieves thatlowerdownpaymentresidentialmortgageloanswillstillbeavailable,evenoutsidethestrict realmofQRMs(includingthroughFederalHousingAdministrationinsuredloans),andthat originatorsandsecuritizerswillhaveanincentive(includinglegalrisk)toapproachthoseloans withunderwritingdiscipline. Wedo,however,believethattheproposedcriteriabasedoncredithistoryaretoo restrictiveintheirrelianceonlatepaymentsonanytypeofdebt,notjustmortgagedebt.Under theProposal,forexample,alatepaymentonanydebtwithinthelast30daysdisqualifiesthe loanfrombeingaQRM.Underthatstandard,onemistakenlymissedpaymentdeadlineona smallconsumerdebtwoulddisqualifytheloanfrombeingaQRM,althoughsuchamistake doesnotnecessarilyindicateariskofdefaultonthemortgageloan.Wesuggestthatthese QRMcredithistoryprovisionsberevisedtorequireno30daylateswithinthepast12months onmortgagedebt,no60daylateswithinpast24monthsonmortgagedebt,andno60day latesonanyotherdebtatthetimeofclosing. 3. ServicingStandardsRequiredinUnderlyingLoanContracts

AMGhassignificantconcernsabouttheservicingparametersthatareimposedupon thisriskretentionexception.Asathresholdmatter,wefindnothinginthestatutethat authorizestheAgenciestoincludethoseprovisions,whichessentiallyaddresswhathappens afteradefault,nothowtominimizetheriskofdefaultbasedontheoriginalloanterms. Requiringmortgageloandocumentstoexpresslyprovideforlossmitigationactivitieswithin90 daysofadelinquencyisunprecedentedandillconceived.Itwillresultinmoralhazardofthe mostblatantkind,nearlybeggingconsumersnottoworryabouttheirfinancialresponsibilities andencouragingthemtoenterintoimportantobligationswhilebearinglittleriskof consequences.WhiletheActandtheProposalareintendedtocreateappropriateincentivesfor disciplinedoriginationsandsecuritizations,theseservicingstandardsdonotinstillanyincentive upontheborrowertoconsidertheirundertakingseriously. Rigorouslossmitigationstrategiesarecertainlyimportant,notjustforconsumerswho areotherwisefacingcostlyanddevastatingforeclosures,butfortheinvestorsintheirmortgage loans,andfortheeconomyatlarge.However,noonewouldpermitamortgageloaninwhich theborrowercontractsto,forexample,offerupexcessequityifpropertyvalueswereto appreciatemorethanexpected;ortomakehigherpaymentsfortheirloaniftheyotherwise enjoyimprovedfinancialcircumstances.Weareonlybeingsomewhatrhetorical;itissimilarly inappropriatetorequireinvestorsinmortgageloanstoagreeupfronttoprovideacounterparty aunilateralrighttoamendthecontractbasedinpartonthecounterpartysfailuretoperform undertheoriginaltermsofthecontract.Thatnotionturnscontractlawonitshead.Webelieve lossmitigationisbetterlefttootherregulatoryinitiativesintheservicingarena.Iftheobjective inpartistobringprivateinvestorsbacktothemarketplace,givingconsumerstheupfront, contractualrighttoreducetheirobligationsbasedontheirownfailuretoperformaccordingto theoriginaltermsisacertainwaytounderminetheachievementofthatobjective. 4. ThreePercentLimitonPointsandFees

Itisnotclearwhya3%caponupfrontpointsandfeesinanywayrelatestothe alignmentofincentivesbetweensecuritizersandinvestorsorlessenstheriskofdefault;the provisionseemstobemoredirectedatprotectingtheconsumeragainstupfrontcosts.TheAct doesnotexplicitlyrequirethiselementforaQRM.AlthoughtheActprovidesthatQRMmaynot bebroaderthanaqualifiedmortgage(aQM),forwhichtheActalsoimposesa3%limiton

 pointsandfees,theActslimitationsinthatregardnonethelessaredrivenbyitsprimary purposeforQRMsandriskretention,whichisthatthesecuritizershouldretainriskexceptinthe caseofastrictlyconstruedsetofmortgageloansthatposelittleriskofdefault.Thus,sincethe 3%limitationonfeesdoesnotrelatetotheriskofdefault,AMGbelievesitisunnecessaryinthe QRMdefinition.Alternatively,iftheAgencieselecttoretainthe3%restrictiononpointsand fees,weaskthatitexcludecompensationpaidbyanemployertoitsemployee.Webelievethe Actsoriginalinclusionofloanoriginatorcompensationwasintendedtoaddressbackend compensationpaidbylenderstomortgagebrokers,suchasyieldspreadpremiums,andnot compensationpaidbyalendertoitsownemployees.Inanyevent,suchcompensationis alreadyreflectedintheloanspricing,andthuswouldnot,initself,relatetoanincreasedriskof default.Webelievetheinclusionofthisprovisionmayresultintheunnecessaryexclusionof loansfromtheQRMexceptionthatotherwisestrictlyadheretotheProposalsconservative underwritingcriteria. 5. RelationshiptoQM

UndertheAct,QRMsmaybenobroaderbutmaybenarrowerthanQMsinthecontext oftheabilitytorepayrequirementsandtheformerimposesaneconomiccreditriskoflosswhile thelatterimposesalegalriskofloss.Thewillingnessofpersonstomake,finance,sell, purchase,securitize,andservicenonQRMsandnonQMsofcoursewilldependontheultimate definitionofthetermsandtheirrelatedtreatmentinthefinalregulations.Themarketwillview thetermsasinextricablytiedtogetherbecauseofthelegalandeconomicconsequencesof fallingoutsideoftheexceptions. ItisunfortunatethattherulemakingforQMandQRMarenotonparalleltracksanddo notinvolveallofthesamefederalagencies.Whileitispossiblethatthefinalruleswillcomeout atthesametime,thecalendarfornoticeandcommentisnotthesame.Theriskisthatfinal regulationsforQRMandforQMwillbereleasedatdifferenttimes,creatingthepossibilitythat thedefinitionswillnotbesynchronizedandpotentiallyrenderingtheQRMdefinitionobsoleteor unworkable.Weurgetheagenciestorecognizethelinkbetweenthetwotermsinissuingfinal regulations. B. ExemptionforFannieMaeandFreddieMacSecurities

Theriskretentionrequirementdoesnotapplytogovernmentsecurities.TheProposal wouldalsoexemptsecuritiesguaranteedbyFannieMaeandFreddieMac,forthedurationof theirconservatorshipundertheFederalHousingFinanceAgency(FHFA),eventhoughsuchan exemptioniscontrarytotheActsexplicitprovisions. AMGunderstandstherationaleforapplyingtheriskretentionrulesonlytothenon conformingmortgagemarket.However,westressthatiftheGSEsemergefromtheir conservatorship,and/orarereengineeredorreplacedbyanewgovernmentsponsoredentityin anymanner(andparticularlyiftheyretaintheirfundingadvantageresultingfromtheirU.S. Treasurycapitalcommitmentandlineofcredit),theAgenciesmustconsiderandimplementrisk retentionrequirementsforthoseresultingentities. C. ExemptionsforOtherQualifiedAssets

WeurgetheAgenciestousetheirdiscretiontocreateotherexemptionsforother qualifiedassetsonlyinconnectionwithtruegoldstandardsforthoseassets,similartothetight

 linesforQRMs.Anyexemptionsshouldbesharplylimitedtopermittheriskretentionrulesto beactivatedandfacilitatethereturnofprivatecapitaltothemarketplace. II. HOLDEROFRISK

TheProposalreflectstheActsintentiontoimposetheriskretentionrequirementupon thepersonresponsiblefororchestratinganddesigningthesecuritization,bygenerallyimposing therequirementonthesponsorofasecuritizationtransaction,asdefinedinRegulationAB. TheProposalwould,however,permitthesponsorandtheoriginator(i.e.,theoriginalcreditor)of thesecuritizedassetstoagreetoshiftsomeoftheriskretentionobligationtotheoriginator undercertaincircumstances,namelyiftheoriginatorcontributedatleast20%oftheassetsin thepool.TheProposalwouldrequirethattheamountofriskallocatedtotheoriginatorunder thosecircumstancesbeatleast20%. AMGmembersgenerallysupportthesponsorsretentionofthefullscopeoftheriskin thesecuritizedtransaction.Aslongastheoriginatorfundsitsportionoftheriskupfront, though,wearenotopposedtotheabilityofthesecuritizertosharetheriskoflosswiththe originator,atleastinthecaseofhorizontalriskretention.Wefeeldifferentlyinthecaseof verticalriskretention.Inthatcasethesecuritizerandoriginatormayagreethattheoriginator willretainanadditionalportionofrisk,beyondthatrequiredbytheAct.However,thediscipline andincentivealignmentthatareatthecoreoftheActsriskretentionrequirementscanonly resultfromrequiringthesecuritizertoretainthefullportionoftheeconomiccreditriskasthe rulerequires.InordertoachievetheActspurposesinthisregard,thesponsormustremainon thehook,andtheamountofriskthatthesponsorisrequiredtoretainmustnotbedecreased. III. METHODSOFRISKRETENTION

AMGstronglysupportstheProposalsprovisionofoptionsfortheretentionbythe securitizerofeconomicrisk,throughhorizontal,vertical,orLshapedslices.Thoseoptionswill generallyallowflexibilityinexecutingsecuritizationswithdifferentoriginatorsandassetpools. However,wedescribebelowourconcernsthatrelateparticularlytothepremiumcapturecash reserveaccount,anditsrelationshiptothehorizontal,firstlossriskretentionoption,specifically inthecontextofresidentialmortgagebackedsecurities. A. PremiumCaptureCashReserveAccount

TheAgenciesProposalexpressesconcernthatasecuritizationsponsoreffectivelymay avoiditsriskretentionobligationsonpremiumorinterestonlytranchesbymonetizingupfront theexcessspreadthatwasexpectedtobegeneratedbythesecuritizedassetsovertime therebyleavingothertranchestoabsorbanyunexpectedlosses. Inordertoprohibitthisresult,theProposalwouldrequirethatthepremiumorpurchase pricereceivedonthesaleofthetranchesthatmonetizetheexcessspreadbeplaced,ascash, intoapremiumcapturecashreserveaccount.Theamountintheaccountwouldbeusedto coverlossesontheunderlyingassetsbeforethoselossescanbeallocatedtoanyotherinterest oraccount.Whilethepremiumcaptureisrequired,asapplicable,whenasponsorretainscredit riskundertheProposalsvertical,horizontal,Lshaped,orrevolvingassetmastertrustrisk retentionoptions,itwouldeffectivelyonlybeneededinthecaseofahorizontalretained interest.

 AstheAgenciesexpect,thispremiumcapturerequirementlikelywilldetersponsors fromstructuringsecuritizationswithpremiumorinterestonlytranches,orotherstructuresthat monetizeexcessspreadupfront.AMGmembersarestronglyconcernedthattherequirement forapremiumcapturecashreserveaccountaspresentlyconfiguredpresentsaserious obstacletostructuringsecuritizations,includingresidentialmortgagesecuritizations,bytaking awayalegitimatesourceoffundstoenablesponsorstorecoupcostsandgeneratea reasonablereturn.Webelievethatthereserveaccountasproposedlikelywillundermineany hopesofrevivingtheprivatemarketforthosesecurities.Moreover,thispremiumcapturecash reserveaccountisnotrequiredbytheAct. Webelievethattheproposedmethodologyforthecalculationofrequiredriskretentionhas thepotentialtoaddresstheconcernthatupfrontincomewouldeffectivelyerasetheriskthat mustotherwiseberetained.Byapplyingtheriskretentionrequirementtothemarketvalue insteadofthefacevalueofthesecurities,theexistingframeworkalreadycapturessomeofthe incomeresultingfrompremiumpricing,althoughwethinkmarketvalueisanawkward, subjectivestandardtoapply.Inthiscontext,werecommendthedeletionofthepremiumcash reserveaccount.Anotheralternative,asdescribedbelow,wouldbetorequirethathorizontal slicesmustamortizenofasterthantheremainingtranches. B. TypesofRiskRetention TheProposalprovidesforavarietyofformsofriskretentionthatwegenerallysupport. Whileweaddressbelowourcommentsregardingrepresentativesampleriskretentionand revolvingassetmastertrusts,ourmajorcommentsarereservedforhorizontalandvertical interests. 1. HorizontalRiskRetention

TheAgenciesProposalindicatesthataqualifyinghorizontalinterestmustbeallocated toalllossesonthesecuritizedassetsuntiltheparvalueoftheclassisreducedtozeroandhas tobethemostsubordinatedclaimtopaymentsofprincipalandinterest.Untilallotherinterests intheissuingentityarepaidinfull,thehorizontalinterestgenerallycannotreceiveany paymentsofprincipalmadeonasecuritizedasset,althoughitmayreceiveitsproportionate shareofscheduledpaymentsofprincipalontheassetsinaccordancewiththetransaction documents.(Alternatively,thesponsormayestablishahorizontalcashreserveaccounttobe maintaineduntiltheotherinterestsarepaid.)Theprohibitionagainstunscheduledpaymentsto thehorizontalinterestisintendedtoensurethatpayoffofthehorizontalsliceisnotaccelerated relativetotheotherinterests. AstheAgenciesrecognize,AMGmembersareveryconcernedthatrequiring a securitizertoretaina5%horizontalsliceofriskismeaningfulonlyif thatsliceortranche amortizesataratenofasterthanthehighertranches.Ifcashflowsofprincipalandinterestare allocatedatafasterratetothelowesttrancheanditisrepaidimmediatelyorquickly,the retainedriskobviouslyevaporates.Thus,thefinalrulemustprovidethataneligiblehorizontal slicemustremainavailabletoabsorblossesforthedurationofthesecuritization.Itmust amortizenomorequicklythantheothertranches.Inaddition,thecouponassociatedwiththe horizontalslicemustnotbehigherthanthehighestcoupononanyissuedsecurities.AMG stronglysupportstheserestrictionsforaneligiblehorizontalinterestandrequeststhattheybe incorporatedintothefinalregulations.

 Toaddresstheconcernthatthatthepremiumcapturereserveaccountisdesignedto resolve,werecommendthatthe5%riskretentionapplytothegreateroftheactualfacevalueof thesecuritiesortheproceedsfromthesaleofthesecurities. 2. VerticalRiskRetention

Wesuggestthattheverticalsliceformofriskretentionbeavailableonlyincaseswhere thesponsorisalsotheservicer,toaligninvestorandservicerinterests.Insuchacasewe recommendahybridformofriskretentionthattakesonsomeofthecharacteristicsofanL shapedformofriskretention.Specifically,inthecaseofverticalriskretentionwenonetheless believetherequirementshouldconsistofthesumof(i)averticalsliceconstituting5%ofthe greateroftheactualfacevalueofthesecuritiesandtheproceedsfromthesaleofthe securities;plus(ii)ahorizontalsliceconstitutingaspecifiedpercentage(wesuggest25%)ofthe salesproceedsinexcessofthefacevalueofthesecurities.LiketheAgencies,wearetryingto balancetheneedsofthesponsortorecoupcostsandgenerateareasonablereturnupfront andoftheinvestorstoensurethesponsorisleavingpotentialincomeonthetableasan incentivetoproducequalitysecuritizations.WebelieverequiringatypeofLshapedrisk retentionunderthesecircumstancesapproachestheappropriatebalance. 3. RepresentativeSamplesandRevolvingAssetMasterTrusts

TheAgenciesalsoproposetoallowasecuritizationsponsortomeetitsriskretention requirementsbyretainingarandomlyselectedrepresentativesampleofassetsthatis equivalent,inallmaterialrespects,tothefullpoolofassets,subjecttocertainconditions.AMG believes,however,thatriskretentionbyholdingarepresentativesampleofassetsis inappropriateforusewithcertaintypesofassetsparticularlyresidentialmortgageloans.The Agenciesindicatethatthismethodofriskretentionhasbeenusedinconnectionwith securitizationsinvolvingautomobileloanswheretheunderlyingloansarenotoriginatedpurely fordistribution,butaresecuritizedbythesponsoraspartofabroaderfundingstrategy.Thus, theAgenciesshouldprovideintheirfinalrulethatthistypeofriskretentionisavailableonlyfor portfoliosecuritizations,andisnotavailableforsecuritiesthatareintendedforothertypesof securitizations. Similarly,theProposalprovidesthatsecuritizationsbackedbyrevolvinglinesofcredit, suchascreditcardaccountsordealerfloorplanloans,oftenarestructuredusingarevolving mastertrust,thatmayissuemorethanoneseriesofsecuritiesbackedbyasinglepoolofthe revolvingassets.Thesponsorthentypicallyholdsaninterestknownasasellersinterest. Thesellersinterestisparipassuwiththeinvestorsinterestinthereceivablesbackingthe securitiesuntilanearlyamortizationevent.Therulestatesthatasellersinterestisadirect, sharedinterestwithalloftheinvestorsintheperformanceoftheunderlyingassets,exposing thesponsortothecreditriskofthepoolorreceivables.TheAgenciesshouldindicateinthe finalrulethatriskretentionthroughasellersinterestisavailableonlyforrevolving credit transactions C. ProhibitionAgainstHedging

AMGsupportstheProposalsimplementationoftheDoddFrankActsprohibitionagainst asecuritizerhedgingitsretainedrisk.Webelieve theProposalappropriatelyreflectsthe intentionofCongressthatthesecuritizermustnotbeallowedtopurchaseorsellsecuritiesor otherfinancialinstruments,orenterintoseparateinsuranceorotheragreements,ifpayments onthoseinstrumentsoragreementsaremateriallyrelatedtothecreditriskofoneormore

 particularintereststhatthesecuritizerisrequiredtoretain,oriftheinstrumentoragreementin anywayreducesorlimitsthesecuritizersfinancialexposuretothatrisk.AMGagreesthat securitizersmay,however,purchasepositionsinnonrelatedassetstiedtooverallmarket movements,suchasmovementsofgeneralmarketinterestrates,currencyexchangerates, homeprices,oroftheoverallvalueofaparticularbroadcategoryofassetbackedsecurities. D. Enforcement

WenotethattheProposaldoesnotprovideamechanismtoenforcetheseriskretention requirementsonthosewhoevadetheActsrequirementstoretainrisk.Weurgethatthefinal regulationsaddressthisissue. IV. NEWRULEMAKING

TheproposedregulationsreflectthecomplexityoftheActsriskretentionprovisions. Theproposalsarelongandcomprehensive,andweassumethatthepubliccommentswill sharethatsamecharacterization.Weareconcernedthatadequateconsiderationofthemany disparatecommentsandanswerstothemanyquestionswillresultinafinalproposalthat materiallyvariesfromtheoriginalproposalandastowhichwewillhavenoadvanceopportunity tocritique.WeappreciatetheAgenciesprovidingthepublicadditionaltimetocommentonthe Proposal.However,werequestthatafterconsideringthosecomments,theAgenciesissuea revisedproposal,solicitingandconsideringanotherroundofpubliccomment,oncethe Agenciesreachaconsensus. V. CONCLUSION

WeappreciatetheextraordinaryeffortandthoughtfulnesswithwhichtheAgencieshave approachedtheProposal.Thisisaverycomplicatedsubject,andtheintroductionofrisk retentionintothesecuritizationmarketplaceessentiallyisanewparadigmastowhichweonly canspeculateonthemarketconsequences.Aswenoteabove,weareconcernedthatthe originalCongressionalintentofQRMasthegoldstandardforprudentunderwritingnotbe diluted.Wethinkthequantitativeaspectsoftheproposedunderwritingstandardsrelatingto income,assetstocloseandpropertyvaluationsforQRMsareagoodstartingpointgiventhe availablehistoricaldefaultdata.Webelievetheapplicationoftheriskretentionrequirementsto premiumpricingwilloffsettheneedforapremiumcapturecashreserveaccount.Whilewe believethatlossmitigationiscriticallyimportanttotheservicingofpooledloans,webelievethat givingdefaultingborrowersthecontractualrighttoreducetheirdebtisafundamentallybadidea andwillunderminethereturnofprivatecapitaltotheresidentialsecuritizationmarketplace.

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 Asindicatedabove,wealsoappreciatetheextensionofthedeadlinetosubmit
commentstotheProposal.Whilewebelieveitisappropriatetosubmitcommentswithinthe originaltimeframe,wereservetherighttosupplementthiscommentletterparticularlyin responsetoothercommentsthatmightbefiled. Sincerely,

TimothyW.Cameron ManagingDirector,AssetManagementGroup SecuritiesIndustryandFinancialMarketsAssociation(SIFMA)

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