FDIC Securitization Rule: 5% Risk Reserve for One Year

The Federal Deposit Insurance Corp. on Tuesday revamped its securitization proposal, mandating that depositories hold a 5% risk retention piece, but exempting loans sold to the GSEs and into bonds guaranteed by the Government National Mortgage Association. The initial proposal issued in November required banks to season single-family loans for 12 months before securitization. As a result of industry comments, FDIC dropped the seasoning requirement and is now proposing that banks issuing residential MBS maintain a 5% reserve fund for one year to cover early defaults and breaches of representations and warranties. The new proposal, which will be published for a 45-day comment period, requires bank issuers to retain 5% of each MBS tranche. The FDIC proposal is designed to update the agency's policies on the treatment of commercial and residential MBS when the issuing bank fails. It is also designed to address problems that arose in the subprime market, placing additional requirements on residential MBS issuers, including disclosures by the servicing bank if they own the second liens on the loans being serviced. "We want the securitization to come back the right way, not the wrong way," said FDIC chairman Sheila Bair. Agency officials noted that their measure is similar to a Securities and Exchange Commission proposal that also imposes 5% risk retention on bank and nonbank MBS issuers. Chairman Bair said the SEC proposal, when finalized, will become the "base" for banks. The FDIC board of directors approved the securitization proposal for public comment by a 3-2 vote. Comptroller of the Currency John Dugan and the Office of Thrift Supervision acting director John Bowman voted against the proposal.