A controversial new rule that will require banks to retain risk on the mortgages they securitize will help bring back investor confidence in the market, FDIC chair Sheila Bair told CNBC Monday.
“I think the securitization market has been gone for a long time," she said in a live interview. "So really something needs to change for investors to have confidence...and that is risk retention and a lot better disclosure and really strong underwriting standards.”
The FDIC is expected to vote Tuesday on what specifically constitutes a “qualified residential mortgage,” which would be exempt from the risk retention rules.
Under the Dodd-Frank financial law, lenders are required to retain five percent of the credit risk on a mortgage they’ve written and securitized. Bair explained the rule will make banks more careful in their securitizations.
“If the securitzer retains the risk...they will have economic incentives to avoid losses,” she said,