When US markets welcomed Donald Trump’s election victory, a central driver for the optimism was his deregulatory agenda and how it could unleash the power of the financial services industry.
Amid the euphoria, securitized product spreads have ripped tighter. After all, as one lawyer at SFVegas said on a panel this week, securitization is “the most regulated area” of the capital markets. Who wouldn’t welcome the chance to lighten the burdens of Regulation AB or Dodd-Frank?
Moreover, Trump has gone after the Consumer Financial Protection Bureau, initially saying it would dismantle the it — though it now looks like a scaling down is more likely.
In any case, this should ease concerns about the CFPB suing securitization trusts if loan servicers collecting on the collateral they hold break the law. A court decision in March last year on a CFPB case against a pre-financial crisis student loan securitization had suggested this was a real threat.
Yet, perversely perhaps, regulatory risk may be higher than ever under Trump.
Firstly, if the CFPB and other regulatory bodies disappear into the background, it will only embolden states to come up with their own rules.
Already this year, Maryland has determined that mortgage securitization trusts need to be licensed in the same way that mortgage lenders are — a move decried as nonsensical by the MBS market, with some issuers keeping loans from the state out of their deals.
Just last week, Massachusetts attorney general Andrea Joy Campbell filed a lawsuit against Hometap, a company that issued two home equity investment securitizations in 2024. The lawsuit alleges that Hometap engaged in “unlawful and predatory practices”.
These are just reminders that states are not afraid to step in when they see fit. What's more, if the federal government leaves a void and a state such as New York or California steps up to fill it, expect far more onerous requirements and restrictions than if there were a federal regulation.
Another Trump target is to privatise Fannie Mae and Freddie Mac. There are several arguments in favour of this, but it will not be easy for the mortgage market and — by extension — RMBS.
It could increase the GSEs’ cost of borrowing, having a huge knock-on effect on mortgage rates, and some fear it could again result in another demonisation of securitization.
Such is the breadth of securitization, in terms of both the assets it covers and the financial complexity it involves, that the chances of it being dragged into some legal dispute in this era of unpredictable policy and counter-policy will remain high.
Be careful what you wish for: some regulation is better than uncertainty.