SEC seeks tighter rules on asset-backed securities

WASHINGTON — Federal regulators on Wednesday proposed new, 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 voted 5-0 to propose that Wall Street firms that package and sell asset-backed securities be required to hold at least 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 proposed rules could be formally adopted sometime after a 90-day public comment period, possibly with changes.

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

Although the vote by the five commissioners was unanimous, two of them — Republicans Kathleen Casey and Troy Paredes — voiced concerns about the new requirement for risk-holding. Paredes said it may not make sense to apply a 5 percent minimum requirement to every offering of asset-backed securities.

The SEC's proposal also would require the firms to 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.

At the same time, a rating from one of the agencies would no longer be required as a condition for SEC approval of the securities offerings.