The Shadow Financial Regulatory Committee is warning that proposed risk retention rules might not deter some MBS issuers from securitizing poor quality mortgages.
"Risk retention will not spur, in our view, very much caution on the part of securitizers," said shadow regulator and American Enterprise Institute fellow Peter Wallison.
The retention risk provision of the Dodd-Frank Act requires issuers of mortgage-backed securities to regain 5% of the credit risk so they have "skin in the game" and bear some of the losses from defaulted mortgages.
However, a recently proposed risk retention rule issued by federal regulators allows securitizers to retain a "vertical slice" of the MBS, which gives them immediate sales treatment under the accounting rules.
Wallison pointed out that holding a vertical slice is unlikely to pose much of a burden on securitizers -- since they make most of their profits from the origination, servicing and management of the pool of mortgages. "So a 5% slice would not amount to a great risk unless there is an enormous loss in the pool itself and it would not deter some from securitizing poor quality mortgages," Wallison said at a Shadow Regulators press conference on Monday.
Shadow Regulators members are generally finance professors and AEI scholars. Wallison presented the shadow regulators position on risk retention.
The former Treasury Department official in the Reagan administration said risk retention is "not working the way it is supposed to work" on a number of fronts. "As a result, the committee recommends that this whole section of the Dodd-Frank Act be repealed and rethought," Wallison said.
