OCC Chief: Tough Underwriting Not 'Skin' for MBS

The Comptroller of the Currency believes that in light of newly proposed accounting rules regarding "sale treatment," the congressional push to impose risk retention or "skin in the game" requirements on MBS issuers will only hamper a recovery in the private label market. Speaking at a American Securities Forum conference, OCC chief John Dugan called risk retention an "imprecise and indirect" way to improve the underwriting quality of residential mortgages. As an alternative, he thinks federal regulators should set minimum mortgage underwriting standards including requirements for verification of income, and minimum downpayments. These minimum standards would insure that newly funded mortgages are financially sound, likely to be repaid, allaying fears that an asset bubble is being created. Mr. Dugan thinks these attributes will attract investors to the securitization process. He supports risk retention but new accounting proposals prevent securitizers from achieving sale treatment on mortgage backed securities if they retain 5% of that risk. The language is part of a House-passed bill and appears in a recent proposal issued by the Federal Deposit Insurance Corp. "I do think...that minimum underwriting should be strongly considered as an alternative to rigid 'skin in the game' requirements," Mr. Dugan told conference attendees.