The Securities and Exchange Commission voted 5-0 today to propose sweeping new rules for the securitization market. With mortgage-backed securities (MBS) playing a prominent role in the financial crisis, the market for packaging loans and selling the resulting bonds has come under intense regulator scrutiny. Both versions of financial reform in Congress include new securitization rules, some of which are echoed in the SEC proposal. Though today's vote just started the process, after receiving public comment the regulator will determine which rules to adopt.
The precise details of the upcoming proposal are not yet known, but some highlights were provided by a fact sheet from the SEC. In contains some good ideas and some not-so-good ideas.
Income Verification Clarity
A failure to sufficiently verify a borrower's income plagued some ultimately toxic subprime mortgage-backed securities. In these cases, the borrower's income was sometimes stated, but unverified or verified through flawed means. Today's proposal would require new securitization deals to disclose how borrowers' incomes were confirmed for the loans being sold.
Standardized Loan-Level Data Provided
Another problem during the bubble was that MBS investors often didn't always have detailed data to analyze. Aggregated statistics were offered, but this could sometimes mask deeper problems with the loans in the pool sold. The new proposal would require computerized loan-level data provided initially and on an on-going basis.