On Tuesday, the Federal Deposit Insurance Corporation (FDIC) voted 3-2 to require ABS sellers to keep 5% of the credit risk in exchange for a guarantee against seizure, The Associated Press reported Tuesday. The theory behind it is that banks with the 5% exposure will be more careful about originating mortgages/loans, etc.
The FDIC board also voted to require the biggest banks to submit "funeral plans" to deal with their possible collapse.
Each measure will now undergo a 45-day comment period, followed by an evaluation and final vote by the FDIC.
Economic Analysis: Look for the bank lobby to oppose the 5% rule. The Bank of America Corporation's (BAC) Jack Schakett, a credit loss mitigation strategies executive, told the AP the requirement would "hamper the housing market."
Even so, some 'retained-stake' provision has to be included in new the ABS/MBS system. Right now, there are too many incentives for banks and mortgage lenders to write problematic loans: retaining a portion of the loss, if the loan goes bad, is one corrective tonic, among others.