Bill HR 1754, of the House Financial Services Commitee, is delayed this month due to the proposed risk retention requirements.
Creditors are being required to retain 10% or more of credit in the securitized loans, and allows regulators the ability to adjust levels between 5 and 10 percent. A 5 percent base is what is preferred by financial institutions. This number will be resolved in the future.
A larger issue is what’s referred to as ” the Need for Skin in the Game”, in the new mortgage lending paradigm. No one currently disputes this at all. Risk retention will need to establish a necessary sense of ownership and responsibility from the originator level of the home loan transaction. However, any risk retention debate would be incomplete if policymakers give equal weight for time, and the need for transparency. One needs both in order for it to be successful.
Once the market (secondary)gains traction, mortgage backed securities, and its investors will need to be able to look at the market and gauge market characteristics and performance of each loan that makes up that pool. Also investors will need a monitoring system that is reliable and allows a view into the performance and payment of each loan within the pool.
This basically has not existed in the past, and the absence of transparency was as much a culprit in the housing collapse just as the “lack of skin in the game” was to blame too. Designers of the systemic regulator bill might want to keep this in mind.