In written testimony prepared for delivery before the Financial Crisis Inquiry Committee (FCIC) yesterday, former Treasury Secretary Henry Paulson said mortgage underwriters and originators should be required to retain some portion of the risk they sell into the secondary market.
‘Requiring underwriters to keep some 'skin in the game' will properly align their incentives with those of investors who end up holding the bulk of the risk,’ Paulson said, further recommending that securities regulations and laws eliminate references to third-party deal ratings.
These ratings, he said, "have tended to serve as a crutch or an excuse, discouraging investors and regulators from doing the necessary credit analysis."
Mortgage bankers strongly protest the inclusion of risk-retention provisions in the current Senate reform bill. Opponents of such measures say risk-retention mandates will hamstring lending capacity going forward.
On the topic of securitization, Paulson also said that better disclosures are necessary.