WASHINGTON – The Securities and Exchange Commission yesterday proposed new rules for the issuance of asset-backed securities, including mortgage-backed issues popular with credit unions, that would require the issuer to retain at least 5% of the credit risk of assets being securitized.
The provision is aimed at ensuring that loan originators, such as credit unions and banks, take greater care in making loans by maintaining some “skin in the game” after the loans are securitized.
Observers argue that issuers of packaged mortgage securities didn't have "skin in the game" and as a result were encouraged to include subprime loans – where borrowers weren't properly screened – in the package because they knew they could sell the pooled security to another party.
"The proposed rules are intended to better protect investors in the securitization market by giving them more detailed information about pooled assets, more time to make their investment decisions, and the benefits of better alignment of the interests of issuers and investors through a retention or ‘skin in the game’ requirement," said SEC Chairwoman Mary Schapiro. "Finally, the rules would bring greater transparency to the private market as well."
The proposal, similar to one backed by the Obama administration, comes as poor quality subprime and other alternative mortgages are causing MBS to go bad.
NAFCU President Fred Becker said credit unions opposed the proposal when it was debated as part of the financial services bill and continue to oppose it because it would make it more difficult and costly for smaller players, such as credit unions, to securitize their loans. “We think it would be bad for credit unions,” Becker told Credit Union Journal yesterday.
The SEC proposal, issued for a 90-day comment period, would wait five days to issue the asset-backed securities after they file a prospectus, as most issues are generally sold through expedited SEC procedures known as "shelf offerings."
The proposal also would require greater disclosures, including information about each loan's performance and whether the borrower's income was verified prior to the loan's origination.
Asset-backed securities, especially mortgage-backeds, are widely seen as a major cause of the financial crisis, especially those issued in the non-uniform, or private-label market. The SEC and the White House hope that new disclosure rules and the skin in the game requirement will help restore confidence to the secondary market for mortgages and other assets, which has been badly hurt over the past three years.
