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ASF offers alternative to Dodd-Frank risk retention

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A securitization trade group is pushing back against Dodd-Frank's 5% risk-retention rule for residential mortgage-backed securities saying its not strong enough to buoy the confidence of investors. The American Securitization Forum said Tuesday it desires a rule that would force companies securitizing loans to retain in effect 100% of the risk by exposing them to tighter compliance with representation and warranties agreements. Risk-retention rules aim to force financial firms to keep some skin in the game by retaining some stake in mortgages securitized for investors. While Dodd-Frank proposed the 5% risk-retention rule to create more security for investors, the ASF has a differing view: one that would force stricter compliance with the rules of contract while pulling in a third-party to investigate disputes. The trade group suggests firms involved in the securitization of MBS would instill more confidence in investors by implementing stronger representation and warranties buy-back agreements and third-party oversight of disclosures about assets underlying securitized loans. This is unlike the risk retention proposal under Dodd-Frank where issuers hold at least 5% of each class of ABS issued in a securitization transaction. This 'skin in the game' provision is meant to offer a hedge against risky structuring as the issuer feels the first losses in the event of default. "The risk-retention rules proposed by regulators are not sufficiently tailored to different asset classes and will likely cause a host of negative unintended consequences," said Tom Deutsch, executive director of the ASF. "Instead, we believe that skin in the game for RMBS would be better implemented through appropriate representations and warranties that issuers provide with respect to securitized loans coupled with an effective repurchase framework like the one spelled out in our new model." ASF is proposing a three-step process for its compliance construct. The group said if a party believes a rep and warranty agreement has been breached, the proposed model would employ an independent third party to review the loan files for compliance with the agreement. The third-party would make a recommendation as to whether the financial institution should have to repurchase the assets from investors. The final step would be a binding arbitration process if the parties disagree with the third-party's conclusion. The idea is to govern the securitization process by ensuring parties take the reps and guarantees agreements seriously and with full knowledge they are on the hook for 100% of the securitized loans. "The ASF believes the strong third-party mechanism set forth in our model re-purchase principles will ensure that representations and warranties in future RMBS transactions are subject to a clearly defined enforcement mechanism, with the beneficial effect of causing asset originators to exercise appropriate caution in underwriting and transferring assets to securitization vehicles," said Deutsch. Write to: Kerri Panchuk.

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