WALL Street regulators yesterday proposed issuers of mortgage-backed securities and similar instruments disclose more about the underlying loans and keep five per cent of the credit risk in some circumstances, in an effort to avoid a repeat of the financial crisis.
The Securities and Exchange Commission (SEC) rule responds to the debacle involving securities packed with subprime mortgages that plunged in value with the downturn in the US housing market. “Changes are both necessary and critical components of restoring investor confidence,” SEC chairman Mary Schapiro said at a meeting of the SEC.
Securitisation of debt and its sale to investors has become an important part of modern finance that allows lenders to quickly lend again to consumers for everything from houses and cars to credit cards.
But the financial crisis exposed flaws in the practice when market participants, including debt-rating agencies, either downplay or ignore the potential for default on the underlying loans. Mortgage-backed securities caused billions of dollars of losses and panicked lenders who sharply curtailed credit, which in turn worsened the recession.