The Senate just rejected a Republican measure to eliminate a provision in the regulatory reform bill that requires ABS issuers to retain "skin-in-the-game," or take steps to ensure that their loans meet standards to reduce risk.
The bill drawn up by Democrats led by Christopher Dodd (D-Conn) compels securitization issuers to carry on their books at least 5% of the portfolio risk from the loans they securitize.
Republican Senator Bob Corker (R-Tenn.) offered an amendment yesterday that would not only remove the skin-in-the-game provision from the bill, but also mandate a study on securitization as well as implement new federal government standards on mortgage loan underwriting.
As part of Corker's suggested changes, the federal loan underwriting standards include a minimum 5% down payment, income verification for borrowers, and an assessment of their ability to repay.
Yesterday Corker released a statement that said that the arbitrary 5% risk retention rule in Democratic Senator Dodd's regulatory reform bill will significantly limit consumer credit availability as well as put many small and mid-sized lenders out of business.
However, despite this turn in events, there's some hope for those against the 5% skin-in-the-game requirement.
ASR sister publication National Mortgage News reported that the Senate is actually pretty close to approving an amendment that would exempt "qualified mortgages" from the 5% risk retention provisions currently in the Wall Street Reform bill.
The amendment, which is sponsored by Senators Mary Landrieu (D-La.) and Johnny Isakson (R-Ga.), mandates federal regulators to exempt low risk, fully documented loans from risk retention.
According to the National Mortgage News report, mortgage industry groups have been pushing for this change, which would allow their members to securitize high-quality loans without retaining any of the credit risk.
"Risk retention is not the cure-all for good lending-underwriting is," Isakson said.
Under the qualified mortgage exemption, any loan with an LTV ratio of over 80% must have mortgage insurance.
However, the amendment does not automatically exempt Fannie Mae, Freddie Mac or the Federal Housing Administration loans from risk retention.
Just like other private-label mortgages, agency loans would have to meet the qualified mortgage test.
The Senate should be approving the Landrieu/Isakson amendment later today. Even Dodd, who is a strong proponent of risk retention, supports the amendment. He said that it "strengthens" the regulatory reform bill.