U.S. Senators Benjamin L. Cardin (D-MD) and Olympia J. Snowe (R-Maine) today introduced legislation to increase the trustworthiness of the nation’s mortgage security market through the establishment of a Federal Board of Certification for mortgage securities.
The secondary mortgage market largely has been an unregulated playground where poorly underwritten, low-quality loans were sold as high-quality investment products. Although mortgage-backed securities can be a positive market force, which increases the available pool of credit for borrowers, without an accurate picture of the risk involved in each mortgage security, buyers have no idea whether they are purchasing a high-risk investment or a safe, secure investment. The Snowe-Cardin initiative would help curb the excesses of the secondary market, combat future attempts at deception, and protect investors by making scrutinized mortgage investments more reliable and trustworthy.
“Financial ratings based on faulty information were one of the root causes of the housing market collapse. As we work to renew our economy, it is essential that we restore faith and legitimacy to the mortgage-backed security market by injecting a new level of transparency and reliability worthy of investors’ trust,”
said Senator Cardin.
“There is no question that the inability to gauge risk in mortgage-backed securities has caused much of the financial turmoil we are experiencing today,”
said Senator Snowe, a senior member of the Senate Finance Committee.
“By shedding light on the risk characteristics of mortgage-backed securities, this legislation is designed to improve investor confidence which, in turn, will help to spur lending and stabilize the crippled housing market.”
Specifically, the Snowe-Cardin initiative creates the Federal Board of Certification to certify that the mortgages within a security instrument meet the underlying standards they claim in regards to documentation, loan to value ratios, debt service to income ratios, and borrowers’ credit standards. The purpose of the certification process is to increase the transparency, predictability, and reliability of securitized mortgage products. Certification would aid in creating settled investor expectations and increase transparency by ensuring that the mortgages within a mortgage security conform to the claims made by the mortgage product’s sellers. Finally, the Federal Board of Certification would be voluntary and funded by an excise tax. Users could choose to pay the costs for the Board to rate their security, or they could elect not to submit their products to the Board.