The banking agencies, SEC, FHFA and HUD have proposed a significant revision to their initial attempt at implementing the risk-retention provisions in Title IX of the Dodd-Frank Act. The law mandated risk retention for many asset-backed securities (ABS) on grounds that pre-crisis practice adhered to an “originate-to-distribute” model that resulted in severe systemic risk and borrower distress. The latter concern is particularly acute with regard to residential mortgages, with the law including a complex regime for defining qualified residential mortgages (QRMs) to be exempt from risk retention. In the agencies’ latest proposal to implement these complex and controversial standards, they have simplified and liberalized the overall risk-retention regime, expanded the classes of exempt or low-retention ABS, and wholly redefined the QRM. This FedFin report analyzes the overall risk-retention framework; subsequent reports will analyze the treatment of other asset classes and the proposed QRM and an alternative, far more stringent option on which comment is also solicited. In this report, FedFin assesses the impact of the new proposals for how risk retention may be structured and/or hedged. The costs of this approach while less than the initial proposal and considerably more flexible with regard to several asset classes (e.g., revolving ABS and asset-backed commercial paper conduits) will still redefine asset securitization in the U.S. and reduce its importance in many respects.
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