Federal regulators are making it difficult for issuers of all types of MBS to escape the costs of risk retention.
The rules officially unveiled Tuesday morning prohibit MBS issuers from receiving upfront compensation based on excess spread through an interest-only tranche or premiums bonds.
"The proposed rule accomplishes this by imposing a 'premium recapture' mechanism designed to prevent the securitizer from structuring a transaction in a manner that would allow the securitizer to take an upfront profit," the rule said.
Any excess spread would be placed in a reserve account that would be separate -- and in addition to the 5% risk retention requirement. The reserve account would be tapped to "cover losses before the losses were allocated to any other interest or account," the proposed rule says.
On Tuesday the Federal Deposit Insurance Corp. and other bank regulators issued the rule for a 60-day comment period.
As reported, the agencies are defining a 'qualified residential mortgage' (QRM) as one with a minimum downpayment of 20% and tough underwriting standards. Only these loans will be exempt from risk retention. (See related story on the National Mortgage News Webssite.)
However, the agencies are seeking comment on lowering the 5% risk retention requirement on non-QRM loans that have mortgage insurance.
The proposed rule also allows securitizers to share risk retention with originators.
Such an arrangement must be voluntary and it is not intended to discourage small originators from selling loans into the pool.
In a risk sharing transaction, the originator must contribute at least 20% of the loans to the MBS and share in a least 20% of risk retention. The originator must pay its risk retention share upfront in cash or by discounting the price of the loans.
