Besides imposing a 5% risk retention requirement on securitizations by banks, the Federal Deposit Insurance Corp. (FDIC) also spelled out new standards that are particularly tough and aimed solely at issuers of RMBS.
Effective Jan. 1, FDIC will require bank issuers to establish a one-year reserve fund of at least 5% of the cash proceeds on residential MBS transactions to cover repurchase demands for breaches of representations and warranties.
And servicers must disclose possible conflicts of interest, such as ownership of second liens on securitized first mortgages that "might impede" their actions to "maximize value for the benefit of the investors," according to the FDIC.
The FDIC board approved the securitization rule on Monday.
"We want the securitization market to come back, but in a way that is characterized by strong disclosure requirements for investors, good loan quality, accurate documentation, better oversight of servicers and incentives to assure that assets are managed in a way that maximizes value for investors as a whole," said FDIC chairman Sheila Bair.
Under the rule, issuers must hire third-party due diligence firms to confirm that mortgages in the pool comply with all supervisory underwriting guidance, including documentation of income.
Servicing agreements must limit the number of advances servicers are expected to front for investors and provide incentives for loan modifications and loss mitigation efforts. Servicers should start loss mitigation efforts "no longer than 90 days" after a borrower becomes delinquent.
Credit rating agencies can receive only 60% of their compensation at the closing of a residential MBS transaction and the rest over a five-year period.
The FDIC rule is designed to be transitional and may have little direct impact.
However, the FDIC, along with other banking and GSE regulators, must craft new standards for all securitizers. Some of the FDIC provisions are likely to be incorporated in that final risk retention rule mandated by the Dodd-Frank Act.