Former US senator Barney Frank has raised concerns over the “continuing insufficient alignment of interest” within the US residential mortgage market.
Mr Frank, who co-sponsored the Financial Reform and Consumer Act of 2012 (the Dodd-Frank Act), gave a keynote speech at the second annual Structured Finance Industry Group’s (SFIG's) conference in Las Vegas last month in which he criticised regulators for removing risk retention requirements for certain mortgages and auto receivables.
According to the Australian Securitisation Forum (ASF), Mr Frank noted that securitisation transformed lending in the 1980s but regulation did not match the financial innovation.
He portrayed the Dodd-Frank Act as attempting to reconnect risk and responsibility, citing the example of AIG selling CDS on pre-2008 securitisations but in 2008 the firm could not provide the US Treasury with an estimate of its liability under the swap contracts, the ASF noted in a conference summary.
Mr Frank argued that securitisation weakens the economic incentives of lenders in the US where the focus is on quantity not quality.
He stated that the risk retention requirements of the Dodd-Frank Act were the least intrusive response the US government could introduce.
Approximately 6,250 securitisation professionals attended the conference in Las Vegas, held 8–11 February.