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Loan originators no longer must have ‘skin in the game’
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Loan originators no longer must have ‘skin in the game’

Robert C. Pozen
Brookings Institution, 2018
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8

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Recommendation

After the Great Recession, US regulators attempted to prevent another credit crisis by enacting the Dodd-Frank Act, which included a requirement that mortgage originators hold at least 5% of an initiated mortgage security on their own books. Senior financial expert Robert C. Pozen discusses a recent ruling that invalidates the 5% provision for some participants and argues that the change, along with the easing of other controls, could pose immense future risk to the financial system. getAbstract recommends this concise and informative report to financial professionals.

Take-Aways

  • A requirement that US mortgage originators hold a minimum of 5% of the value of a debt instrument seemed a logical attempt to promote a “skin in the game” mentality.
  • Regulators have spared the 90% of the nation’s mortgages that are insured by the Federal Housing Administration (FHA) or sold to Fannie Mae and Freddie Mac from the 5% provision.
  • A February 2018 federal court ruling further weakened the 5% rule by removing the restriction on some fund managers.

About the Author

Robert C. Pozen, a senior fellow at the Brookings Institution, was formerly executive chairman of MFS Investment Management.

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