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SEC Passes New Rules for Disclosures on Asset-Backed Securities

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AP
SEC

Earlier today, The Securities and Exchange Commission passed new regulations regarding banks treatment of asset-backed securities . The regulation affects two principal aspects of disclosure: First, disclosures made during the initial sale of the asset-backed security; second, ongoing disclosure related to the risk exposures of existing securities.

According to recent reports about this breaking story, regulations will contain at least two distinct and important rules.

The first concerns disclosure about the credit quality of underlying assets and asset back securities.

From the New York Times DealBook:

"One rule, which will take effect early next year, will require banks and other financial firms that issue asset-backed securities to review the quality of the underlying assets, which includes mortgages, credit card debt and student loans. The banks would then have to disclose their findings to investors.

The second rule affects the contentious issue of mortgage repurchases—which we have reported on extensively here at NetNet.

Once again, from The New York Times DealBook:

"A related regulation, which the agency's commissioners approved unanimously, would force banks to provide more information about mortgage repurchases—an especially thorny issue right now. Big investors have demanded that big banks repurchase loans they packaged together and sold at the height of the mortgage bubble. Investors claim banks' were lax in their underwriting standards."

And also this:

" Under the S.E.C.'s new rules, banks and other issuers will have to disclose in filings the numbers of requests they've gotten to repurchase troubled assets. Starting in February 2012, the issuers will also have to report how many buybacks they have made, dating back three years."

It will be rather interesting to observe whether substantially greater transparency is required with regard to the treatment of outstanding mortgage repurchase claims.

Repurchase claims involve the so-called "service books" of loans held by banks. The service books are not carried on banks' balance sheets.

To date, assessing the risk exposure and potential liabilities created by the assets contained in banks' service books has been a quite challenging task.

The effects that increased disclosure and transparency will have on valuations of the largest US banks—with the greatest repurchase exposures—remains to be seen.

This may prove to be a very significant story.

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