Questions Remain on Securitization and 'Skin in the Game'

Industry lobbyists are having a hard time getting senators or their staffs to focus on the issue of MBS risk retention, which could dramatically reduce the securitization of mortgages and other assets - and increase the cost of credit. Senate Banking Committee members are intensely engaged in drafting a regulatory reform bill and fighting over ways to protect consumers, regulate derivatives and deal with the issue of institutions that are "too big to fail." At the same time, there is a consensus on the committee that securitizers - especially those creating MBS - should retain 5% to 10% of the risk when they issue mortgage-backed securities. The holding of this risk is called "skin in the game" and lawmakers see it as a way to prevent another subprime meltdown. But accounting rule changes and a capital regulation recently finalized by the banking regulators have turned this politically attractive concept of imposing risk retention into a roadblock to securitization. "It will not work," said Anne Canfield, executive director of the Consumer Mortgage Coalition. "You will not have any securitizations any more." Under the new capital rule, any bank retaining credit risk (and therefore potentially sharing losses) must hold capital against the entire MBS, not just 5% of the MBS. The risk retention requirement and the additional capital charge "eliminate any benefit of securitizing assets," Ms. Canfield said.