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Private-Label MBS Risk Retention Could Be Steep

A revival of the private-label mortgage market - including jumbo securitizations - could be a long way off if newly proposed legislation becomes a reality.

Senate Banking Committee chairman Chris Dodd, D-Conn., drafted a bill that would require sellers of mortgage-backed securities to retain 10% of the credit risk. Total or partial exemptions are granted for GSE-backed loans and FHA products.

Democratic lawmakers want to hold lenders and securitizers feet to the fire so they won't originate and sell mortgages that burn consumers and investors. But the industry fears it could stifle a recovery in the private-label market, which has been dormant since the credit crisis began.

The bill carves out government-guaranteed loans and provides flexibility for other exemptions, said Scott Talbott, the Financial Services Roundtable's top lobbyist. But to issue a private-label MBS, the securitizer would have to make a case for the regulators to reduce the 10% retention requirement. "We think 10% is too high as a starting point," Mr. Talbott said. "We think 5% is the right place to start."

Independent mortgage bankers also want risk retention reduced to 5%. Glen Corso, managing director of the Community Mortgage Banking Project, is wary of exemptions in the Dodd bill. He pointed out that the way securitizers are defined it could "rope in" Ginnie Mae issuers and make them subject to risk retention.

"We are not 100% convinced that the way it is worded the exemptions will be effective," Mr. Corso said.

The risk retention language is contained in Dodd's 1,100-page bill designed to revamp regulation of the financial services industry and safely shut down firms that are considered "too big to fail."

"To restore confidence in our markets and encourage investment, we will require companies that sell products such as mortgage-backed securities to keep 'skin in the game' so that they won't sell worthless securities to unsuspecting investors," said Sen. Dodd, introducing his bill. In the Dodd bill, the Securities and Exchange Commission and federal banking regulators can approve a total or partial risk retention exemption for other MBS and allocate risk retention between securitizers and the lenders.

Back in May, the House of Representatives passed a subprime lending bill (H.R. 1728) that requires lenders selling and securitizing subprime mortgages to retain 5% of the credit risk.

House Financial Services Committee chairman Barney Frank, D-Mass., drafted the bill and now wants to attach it to regulatory reform legislation his committee is working on. In drafting his bill, Chairman Frank bumped up the risk retention requirement to 10%. He also excluded the exemptions for government-guaranteed loans and other "qualified mortgages" that industry groups liked in H.R. 1728.

This week, the Financial Services Committee resumes the markup of its bill. Industry groups are supporting an amendment that will reduce the risk retention requirement to 5%.

"We want 5% to be the ceiling not the floor," Mr. Talbott said.

Industry groups also want exemptions added to the bill. "The amendment will try to reinstate the provisions of H.R. 1728 with regard to qualifying mortgages," Mr. Corso said.