WASHINGTON Senate Republicans moved on Tuesday to kill part of a far-reaching Democratic Wall Street reform bill that seeks to crack down on mortgage securitization, a financial practice blamed widely for helping to inflate the subprime mortgage bubble.
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.
WHITE HOUSE: SECURITIZERS SHOULD HAVE A STAKE
The White House last week posted on its online blog a list of the "Top 10 Most Wanted Lobbyist Loopholes" being sought by the financial industry in the Democratic reform bill.
No. 9 on the list was "letting firms make loans without skin in the game." The blog said the financial crisis showed that "firms in the mortgage business should have a stake in the loans they sell or securitize. Skin in the game gives strong incentives to make good quality loans."
It said mortgage industry lobbyists were pushing to kill the "skin in the game" idea.
"It's cheaper for mortgage lenders and Wall Street to be in the mortgage business if they don't have to worry about the borrower's ability to pay -- but it's a lot more costly for Americans to perpetuate the same system that helped cause the housing crash," the White House blog said.
The U.S. House of Representatives approved a bill overhauling financial regulation in December. It included a five-percent skin-in-the-game requirement for securitizers.
Any bill produced by the Senate would have to be merged with the House bill before final legislation could be sent to President Barack Obama to be signed into law. Analysts say that could happen by mid-year.
(Reporting by Kevin Drawbaugh; editing by Carol Bishopric)