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It may have been a government holiday, but Veteran’s Day this year was a working day for financial services officials in Washington. Senate Banking Committee chairman Christopher Dodd released his financial reform bill late Tuesday evening. Instead of spending down time with friends and family, industry types occupied their day devouring the details of the 1,000-page proposal.
There’s a lot to digest in Dodd's Discussion Draft: Restoring American Financial Stability
One of the tidbits we have found interesting so far is Section 1503, which requires the Securities and Exchange Commission to adopt regulations "requiring each issuer of an asset-backed security to disclose,
for each tranche or class of security, information regarding the assets
backing that security.””
The bill calls for the SEC to set standards for the format of data provided by issuers of asset-backed securities to “facilitate comparison of the data across securities in similar types of asset classes.”
This will be a formidable standard to put into practice. Or least it will be, if the right tools aren’t in place. This section of the bill is incredibly important to the future of a stable secondary mortgage market. It goes right to the heart of two key issues:
- “skin in the game”
- transparency
This is where Chairman Dodd is demanding that the new system of securitization provide what the old system failed to offer: a way for investors to perform their own, independent due diligence on asset-backed investments. If such a measure is passed – and we hope it is --- issuers of mortgage-backed securities will need to disclose asset-level or loan-level data. It would require reliable ways to identify individual loan brokers and originators, how they’re compensated and the amount of risk being retained by the originator or the securitizer of the mortgage loan.
No doubt we’ll hear lots of kicking and screaming over this part of the proposed legislation, likely to no avail.
If we are to see confident investors return to the mortgage securitization market, Section 1503 is the harbinger of that comeback. Rather than hand-wringing, we would be well to start thinking now about the mechanics necessary to implement the Dodd’s call for new transparency in the coming era.
HERE is the full discussion of the bill