In drafting risk retention rules, federal regulators should consider the impact capital and accounting requirements will have on issuers of private-label MBS, according to a new report from the Federal Reserve Board.
In isolation, requiring MBS issuers to retain a portion of the credit risk would have "modest effects on the provision of credit through securitization channels," the Fed report says.
However, the "interactions" of accounting treatment and regulatory capital requirements "may have a significant effect on the cost and availability of credit."
The Fed suggests that adjustments to capital requirements and accounting standards could be made to ease the impact. But Dodd-Frank requires regulators to issue final risk retentions rules in six months and there may not be enough time.
Glen Corso, managing director of the Community Mortgage Banking Project, said the report reflects a very "even-handed thoughtful approach unlike what we have seen from some other federal agencies."
The Fed also recommends that the regulators develop separate risk retention requirements for each asset class — residential MBS, commercial MBS, credit card securitizations and others, an idea that pleases the Mortgage Bankers Association.
"The report closely parallels our own recommendations to the Fed, principally that the financial regulators ought to tailor risk retention requirements to specific asset classes and recognize risk retention practices that already exist," said MBA chairman Robert Story.
The Dodd-Frank Act requires private-label MBS issuers to retain up to 5% of the credit risk, ensuring these firms have "skin in the game."
But the law, passed by Congress in July, also gives the regulators the discretion to lower the percentage, and totally exempt low-risk, safe "qualified residential mortgages" from risk retention.
