Capitol Hill is such an insular place that pungent phrases describing a particular political predicament circulates among congresspersons with the speed of a good after dinner joke. Three of the most popular ones are canine: “this dog won’t hunt,” “sometimes the dogs just won’t eat the dog food” and, “if you want a friend in Washington, get a dog.”
Dogs have nothing to do with the latest Washington mot du jour. Like the mood on the Hill these days, it’s graphic, painful and not at all like man’s best friend. It’s “having skin in the game” and it means having a stake or a vested interest.
Two of the most powerful members of the House on housing policy told a group of real estate journalists Friday that originators having skin in the game is the single most important feature affecting housing finance in the regulatory reform legislation now before the House Financial Services Committee.
“The most important principle in the reform debate is that no one will securitize 100 percent of any loan. The risk retention requirement for originators will be at least five percent of the loan,” said Rep. Barney Frank (D-MA), chairman of the committee.
When servicers have skin in the game, he said, they will have an incentive not to make bad loans and they will make sure borrowers are able to repay the loan.
The requirement to have skin in the game will increase originators’ capital requirements; no longer will size be such an advantage. In the new regulatory environment where risk is shared, the new regulatory regime will include a systemic risk regulator.
Frank’s committee is scheduled to work on the massive regulatory overhaul through the summer with the goal of getting it to the House floor in the September. The Administration is pushing hard to get it done by the end of the year, the way mortgages are financed could change radically as soon as next January. Originators will be required to share risk and provide capital. Investors in secondary markets will hopefully have greater faith in the quality of the bundled securities they buy. Will the financial sector adapt quickly enough to meet the financing needs of the recovering housing markets?
Frank also spoke candidly of other provisions he would like to see, such as a way to use repaid TARP monies to help stem foreclosures or finance an affordable housing trust fund and to fund shortfalls at FHA.
“Homeownership as a goal is greatly flawed,” he said at the outset of the session with reporters, a sentiment he’s expressed many times. It’s one of the problems that caused the housing crisis.