The Treasury Department circulated a proposal Monday to require originators to retain 5% of a loan's credit risk when selling it into the secondary markets.
An early snippet from the Obama administration's regulatory restructuring plan, which is expected to be unveiled Wednesday, the proposal also would ban loan originators from hedging or even indirectly transferring the risk they are required to retain. Broker and loan officer compensation would be disbursed over time and reduced if a loan is not repaid because of poor underwriting.
The proposal is similar to a more targeted one by House Financial Services Committee Chairman Barney Frank that passed the House on May 7. But that would apply only to certain subprime loans and would even allow federal regulators to lower the 5% threshold.
Some political analysts said the president's broader plan has no chance on Capitol Hill.
"Congress is not going to impose a 'skin-in-the-game' requirement on all loans," said Jaret Seiberg, an analyst with Washington Research Group, a division of Concept Capital.
Laurence Platt, a partner with K&L Gates LLP who specialized in housing finance, agreed that the administration's plan is too aggressive.
"The proposal seeks to alter the fundamental DNA of securitizations by sanitizing the transaction against any risk of nasty and brutish behavior," he said. "It sounds interesting in a petri dish, but I'm skeptical about its implementation, because they appear to be reverse engineering the entire securitization process and imposing material restrictions at every level.