A provision in the law overhauling U.S. financial regulation should help to reduce the rate of losses on mortgage-backed securities, according to a paper released by the Federal Reserve Bank of San Francisco.
The law, named after principal authors Connecticut Senator Christopher Dodd and Massachusetts Representative Barney Frank, requires mortgage originators to retain at least 5 percent of the credit risk associated with loans underlying residential mortgage-backed securities.
Such a requirement “is likely to have a significant impact on loss rates,” Christopher James, a visiting scholar at the bank and finance professor at the University of Florida, wrote in a paper released today. “In short, skin in the game matters.”
The Dodd-Frank law was enacted in July in response to a credit crisis that began in 2007 and has resulted in $1.82 trillion in writedowns and credit losses at financial firms globally. Dodd and Frank are Democrats.
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