Excerpt
A provision in the Democratic bill would force some lenders to retain on their books at least five percent of the risk in mortgages that they bundle and package for resale as securities on the secondary debt market. The idea, known as requiring "skin in the game," is opposed by the mortgage industry.
Republican Senator Bob Corker offered an amendment on Tuesday that would strip the "skin in the game" provision out of the bill, mandate a study on securitization, and impose new federal government standards on mortgage loan underwriting.
"The arbitrary five percent risk retention standard in the Dodd bill will greatly limit the availability of consumer credit and put many small and mid-sized lenders out of business," Corker said in a statement.
Democratic Senator Christopher Dodd, the reform bill's chief author, called for the Corker amendment to be rejected. "Excesses and abuses in the securitization process played a very major role in this financial crisis," he said.
"If you don't have skin in the game, if you don't have a vested interest in this, you don't care about the outcome."
A vote on the Corker amendment was expected on Wednesday, along with some related mortgage-market amendments.
The collapse in 2007-2008 of the subprime mortgage bubble triggered the worst financial crisis in decades. It shook economies worldwide and led to taxpayer bailouts of banks and Wall Street firms, including some top securitization firms.
SECURITIZATION REFORM KEY
Congress is working on the biggest rewrite of financial regulation since the 1930s, aiming to make banks and capital markets more stable. Securitization reform is a key part.
The practice was widely used in the government-guaranteed mortgage market for many years, but when Wall Street got involved and started securitizing lower-quality, subprime loans, discipline in the loan process broke down.
Critics say securitization, especially in the non-government subprime market, eroded lending standards, by allowing lenders to quickly sell off loans they made, reducing their interest in ensuring the quality of the loans.
Dodd's bill proposes that lenders either submit to the baseline 5-percent skin-in-the-game rule, or take steps to ensure that their loans meet standards that reduce risk.
Corker's amendment would delete the "skin-in-the-game" provision and require that mortgage borrowers' income be verified; that borrowers make a downpayment of at least five percent; and that lenders assess borrowers' ability to repay.
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