According to a Bloomberg report, the final disclosure rules for asset-backed bonds issuers are to be announced by the U.S. Securities and Exchange Commission (SEC), later this week on Aug 27. As per the proposed rules, which were commanded by the Dodd-Frank Act, sellers of bonds backed by mortgages and auto loans will be bound to provide investors full information including the borrowers’ income and credit scores. Notably, for investors, asset-backed securities act as an alternative to corporate debt.
Implementation of such rules commensurate from the bad loans sold by Wall Street before the 2008 financial crisis. Bank of America Corp. (BAC - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report), Deutsche Bank AG (DB - Analyst Report), Citigroup Inc. (C - Analyst Report) and Goldman Sachs Group Inc. (GS - Analyst Report) are among the largest sellers of asset-backed securities.
Rising subprime auto loans, which are packaged into securities, drew the attention of U.S. regulators to investigate such business. Under the purview of tougher disclosure rules, the SEC includes securities backed by loans for houses, autos and commercial real estate. However, complete rules for bonds backed by student loans or business inventory purchases will be considered later by the SEC.
According to officials, investors require due diligence before investing in asset-backed securities. The SEC rules would include more informative disclosures to be provided to investors about loans which are bundled into bonds by issuers so that the bond buyers are not driven by faulty credit ratings. Notably, the agency requirements would also include private sales of asset-backed securities, which were prior exempted from reporting to the SEC.
The private mortgage-backed securities market worth $750 billion will be under the new SEC requirements. Notably, the private market impacted by the financial crisis of 2008, financed only 1% of new mortgagees in 2013.
However, issuers of government-backed mortgage bonds, including Fannie Mae (FNMA - Snapshot Report) and Freddie Mac (FMCC - Snapshot Report) would not be affected by the new rules. These sellers already provide investors with information related to borrowers’ ability for repaying loans. Such issuers’ disclosures include states of residence, credit scores and debt-to-income ratio, though these are not as tough as proposed by the SEC.
Asset-backed securities lose value if the homeowners, car buyers or credit-card users default on their debts. During the financial crisis of 2008, such defaults led financial institutions and investors with bad securities worth billions of dollars. Therefore, to combat such crisis, SEC is set to finalize a new set of disclosure rules for such asset-backed bonds issuers so that investors are safeguarded and fully abide by the risks underlying in such securities.