The Securities and Exchange Commission joined the chorus of policymakers calling for institutions to retain "skin in the game" in securitizations — raising the odds such a requirement will become reality.
Senate Banking Committee Chairman Chris Dodd, D.-Conn., has been pushing a similar plan to force lenders to retain a minimum 5% of the credit risk in assets they sell. Unlike that provision, which is included in the Senate and House regulatory reform bills, the SEC's proposed rule, unveiled Wednesday, does not need to pass Congress.
However, unlike Dodd's measure, the SEC proposal would affect only those companies at one end of the securitization chain — those that issue securities to investors. It would not apply, say, to small mortgage companies that sell pools of whole loans to those aggregators. Nor would it apply to securitizations guaranteed by Fannie Mae, Freddie Mac or the Government National Mortgage Association.
"Risk retention is imposed across-the-board in the Dodd bill. They're trying to capture everything," said Glen Corso, who runs the Community Mortgage Banking Project, a fledgling trade group. "But under the SEC proposal most of the mortgage market would be exempt."
Nevertheless, he and other industry advocates sounded familiar warnings that the SEC's plan would have unintended consequences.
Under the proposal, companies would have to retain at least 5% of the credit risk of each class of securities issued from a pool, regardless of rating.
Corso said issuers of private-label securities would likely pass the costs of retaining more capital onto lenders by lowering the prices they pay for mortgages. That, in turn, could drive up rates for consumers, he said.
"How are the issuers going to reflect this in the way they buy and acquire loans from originators?" Corso said. "If they're paying lower prices for the assets it would push mortgage rates up."
Similarly, Tom Deutsch, executive director at the American Securitization Forum, said the SEC's 5% risk-retention requirement would "significantly reduce the availability and affordability of private lending to consumers."
In a speech Wednesday, SEC Chairman Mary Schapiro said securitization "fostered poor lending practices by encouraging lenders to shift their risk of loss to investors."
The SEC proposal would also require greater disclosure of loan-level information including how losses are divvied up among investors. Issuers also would have to wait five business days between the filing of a prospectus and the sale of any securities to give investors more time to analyze data. The SEC set a 90-day public comment period on its proposal.
