Starting January 1, FDIC-insured institutions will have to retain 5% of the credit risk on newly issued securitizations until the federal banking agencies approve new risk retention standards next year as mandated by the Dodd-Frank Act.
The Federal Deposit Insurance Corp. board adopted the 5% risk retention requirement by a 4-1 vote in updating its safe harbor rules involving the treatment of mortgage-backed securities and other securitizations issued by failed banks.
"The rule is fully consistent with the Dodd-Frank Act to apply a 5% risk retention requirement," FDIC chairman Sheila Bair said, until the agencies adopt new mortgage underwriting and risk retention standards.
Ginnie Mae guaranteed transactions issued by banks are exempt from the FDIC rule. "We worked that out very closely with Ginnie Mae to make sure there were no unintended consequences," an FDIC official said.
The FDIC safe harbor rule only applies to bank issuers and does not affect MBS guaranteed and issued by Fannie Mae and Freddie Mac. In other words, it appears the rule will only apply to private-label securities.
The FDIC rule requires bank issuers to retain a 5% vertical slice of a securitization. The Dodd-Frank Act allows the banking agencies to lower the 5% risk retention requirement and exempt certain low-risk "qualified mortgages" from the set-aside.
The banking agencies are supposed to complete that rulemaking in the second quarter of 2011.
"We look forward to working with our colleagues in developing those standards," said Bair. "Once they are in place, our rule will automatically conform to the interagency regulations."
The FDIC board also approved a proposal on Monday that extends full deposit insurance coverage for certain non-interest bearing accounts until yearend 2012. This extension will continue coverage for escrow accounts deposited by mortgage servicers. The proposal has a short comment period that ends Oct. 15.
