Regulatory Reform: More Disclosure for SecuritiesOn Wednesday, the Obama administration will propose new rules for asset-backed securities, including requiring trades to be reported on an electronic database, according to Treasury source.
The plan will require loan originators to retain 5 percent of the credit risk on loans they package into securities, says the Treasury. Issuers of the securities will also be subject to additional disclosure in public filings including revealing loan-level amounts. Asset-backed securities made up of mortgages and other loans helped fuel the credit crisis by encouraging banks to lower lending standards. Treasury Secretary Timothy Geithner spoke on Monday in New York and says the plan will fill gaps in the oversight of such instruments. They will also require a great deal more disclosure and reset incentives back to where excessive risk doesn't play into decision.
The proposed asset-backed rules will require fees and commissions received by loan brokers and officers to be paid over time, not all at once. The payments also will be reduced if a loan isn't repaid because of poor underwriting standards.
Under the plan, asset-backed securities would have to be reported on TRACE, the electronic trading database run by the Financial Industr Regulatory Authority, (FINRA) a self-regulatory group for securities firms. TRACE now is used to show prices in the U.S. corporate debt market.
Administration officials said they're trying to make securitization more transparent and safe rather than banish the practice.
"In theory, securitization should serve to reduce credit risk by spreading it more widely," Geithner and National Economic Council Director Lawrence Summers wrote in an editorial opinion piece on Monday in the Washington Post. "But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust."
Geithner says it is imperative lawmakers act while the memory of the crisis is still acute in peoples' minds, "because we don't want complacency to set back in."