The financial crisis has exposed the "weaknesses" in the securitization market, Federal Deposit Insurance Corp. Chair Sheila Bair said, and it needs to be reformed through a re-alignment of interests to improve the long-term performance of mortgage-backed securities.
"The regulatory system needs to make certain that the right people have skin in the game and get paid not for short-term gains, but for taking the long view," Bair said at an event sponsored by ASR sister publication American Banker. "Investors have lost faith" in the private-label MBS market, she said.
Over $1 trillion dollars of private-label MBS was issued in 2005 and 2006, but issuance has dropped to "virtually zero" in the third quarter of this year.
"Securitization will eventually come back," she said. "But fundamental reforms will be necessary to ensure that incentives are aligned to produce transparency, stability and confidence of all market participants."