Risk Retention Debate: Progress on Some Issues, but Not All

Securitization market participants appear to be unified on eight issues related to risk retention proposals and split on two, according to a draft report by a group that represents both the "buy" and "sell" side of trades. The group is split on a portion of the legislative proposal which makes it possible in the commercial mortgage market to have a third-party purchaser retain the first-loss position if that purchaser specifically negotiates for such a position and performs due diligence on the pool. According to the American Securitization Forum's June 11 draft report on its membership's response to financial regulatory reform proposals by the House and Senate, certain of the group's members "believe this alternative form of retention should be available for other asset classes." However, it said, other members "believe retention of risk by a third-party purchaser is not retention at all, because it allows the issuer to sell the risk which does not align incentives or result in prudent securitization practices." The group also remains split on whether "qualified" securitized mortgages underwritten to "prime" credit standards should get an exemption. Some members believe allowing a "qualified" mortgage exemption would ensure "incentives are aligned between originators and investors." Others said they are concerned that "while a 'qualified mortgage' would require some minimum in quality, it would not require an issuer to have ongoing 'skin in the game' with respect to the securitization." While the membership is split on the aforementioned two issues, it is unified in pushing for proposals that allow for "adequate representations and warranties and enforcement mechanisms" to be used as an alternative for risk retention.