A report issued today by the Department of Treasury offers a window into what risk retention changes the government will demand of securitizers.
Specifically, Treasury spelled out several risk retention options. They are:
- vertical risk-retention: retention of a pro rata economic interest in the credit risk of the securitization;
- horizontal risk-retention: retention of a first loss interest in the securitization;
- representative sample: retention of a subset of assets that are selected randomly from the original pool intended to be securitized that has credit risk characteristics similar to those of the securitized assets.
Interestingly, Treasury suggested that the new framework for risk retention could allow securitizers to “choose from a list of permitted choices” for risk retention. That’s a liberating idea: choice for securitizers.