SEC seeks tighter rules on asset-backed securities

WASHINGTON -- Federal regulators worked Wednesday toward laying down stricter rules for asset-backed securities, the bundles of loans that helped spark the market's collapse in 2008 and nearly brought down the financial system.

The Securities and Exchange Commission is expected to propose that the Wall Street firms that package and sell asset-backed securities be required to hold 5 percent of the loans -- mortgages, credit cards, auto loans -- on their own books.

With some "skin in the game," the thinking goes, the firms would be more careful to ensure that borrowers are properly screened. Experts say it was the lack of "skin" that enabled a system in which the bundles of mortgage loans were whisked from investor to investor, with no one assuming responsibility for the risk until the roof caved in.

The SEC proposal would require the 5 percent minimum holding by the firms as a condition for their offerings of asset-backed securities to be approved by the SEC for sale to investors.

The proposal also would require the firms provide fuller disclosures on asset-backed securities.

The disclosures would include information on every underlying loan in a package. For example: What type of mortgage loan was involved? Were complete documents required from the borrower? Or was it a "no-doc" or "liar loan"?

The idea is to give investors more information in order to better judge the securities' risk. That would reduce reliance on the Wall Street credit rating agencies. The three big agencies -- Moody's Investors Service, Standard & Poor's and Fitch Ratings -- were widely criticized for failing to give investors adequate warning of the risks in subprime mortgage securities that triggered the financial crisis.

The proposed rules could be formally adopted sometime after a 90-day public comment period, possibly with changes.

Provisions in the House and Senate versions of financial overhaul legislation also would require the "securitizers" to keep some of the risk themselves.

As lawmakers and government agencies have been looking to lay down new rules for asset-backed securities, another idea is to set an industrywide lending standard that would govern minimum down payments, borrowers' debt levels and other requirements. That has drawn opposition from the financial industry.

The Federal Deposit Insurance Corp. has floated a proposal to require new lending standards. Asset-backed securities would have to meet the standards to maintain a guarantee that the government wouldn't seize them if the bank failed.

"These reforms will help restore investor confidence ... and prevent a recurrence of the crisis we are now working through," FDIC Chairman Sheila Bair said last month.

But industry interests maintain such rules would make banks skittish about investing in any mortgage-backed securities.

"Heaping on hundreds of ideas may ultimately weigh down the return of the market at a time when it's most needed" to make loans more available for consumers, Tom Deutsch, executive director of the American Securitization Forum, said Tuesday.