Anastasia Vasilenko commented on the Central Bank proposal to reduce the amount of information disclosed regarding mortgage-backed securities
On 16 November, the President’s Council for Codification and Civil Legislation Improvement will discuss a bill to simplify the issuing of mortgage bonds. The bill is intended to make life easier for issuers, while providing additional protection to investors. However, an unresolved issue remains cross-defaults, which occur when a default on one issue leads to the default of the whole program.
Changes in the law On the Securities Market and On Mortgage Securities, introduced in the government’s bill, simplify the procedure for issuing mortgage-backed bonds. This measure is intended to promote the securitization of bank assets related to mortgage loans to make implementation cheaper and faster. The bill eliminates the need to prepare a separate bond issue and legalizes the mortgage bond program. Such a program should include a reference to the provision of mortgage-backed securities, the number of mortgages involved in the issue program, stating that it is a single mortgage-backed security or has no limit on the number, the sequence of the execution of obligations for bonds with a single mortgage, as well as information about the person providing additional collateral for such bonds.
A need to create a separate mortgage agent for each bond issue also will disappear. Previously, this rule was to avoid cross-default, which occurs when a default on one issue leads to the default of all issues. “This provision was unnecessary for the mortgage-backed bonds, since the performance requirements can be accomplished through the use of collateral,” noted Maxim Pleshkov, the director of the Rus-Rating corporate rating agency. A requirement for guaranteeing the financial stability of the mortgage agent was, in his opinion, also unnecessary. “It is more important for an investor to have confidence in the quality of the mortgage collateral than to know the net asset value of the mortgage agents,” Mr. Pleshkov said. However, the managing partner of the consulting company Heads, Alexander Bazykin, believes that this decision is only a “cosmetic restoration” of the mortgage bond sector and market promotion that does not solve the root problem of cross-defaults. As he stated, “a default by one of the issues still means a complete failure to fulfill the obligations on the bond issue.”
The project also eliminates the need for the government to agree with replacing of requirements included in the mortgage collateral if the need for such a replacement is stated to the bondholder in advance. In addition to reducing the time for transactions, the new requirements will help protect the interests of investors. “The current provisions of the law allow for the exclusion and replacement of mortgages in mortgage-backed securities only when a certain delay on them occurs. The problematic mortgage, which must be replaced, can be identified before the onset of the delay, but the law prevents its replacement at that point,” explained Mikhail Koterev, the head of structured finance and asset securitization at VTB 24.
The development of a “mortgage paper” also requires changes in the position of the Bank of Russia, and the necessary amendments are included in the draft titled On the disclosure of information by issuers of securities, which is open for public discussion until 11 November. The disclosure of additional information concerning securities with mortgage collateral is not present in the many technical nuances.
Anastasia Vasilenko, a lawyer in the Dispute Resolution Practice of the ART DE LEX law firm, notes that the draft law concerns information about the inclusion of mortgage-backed securities in instances when construction still is ongoing as well as changes in the composition and size of the collateral on bonds.
