When regulators asked for comments on a proposed rule about retention of risk in issuing mortgage-backed securities, they got back an earful about "skin in the game," thought to be a crucial component in eliminating toxic securities. But will this attempt to align interests really avoid the next disaster? And are there better risk management policies that might be more effective?

These issues were aired at a House oversight subcommittee hearing last month. The hearing offered a look at how complex even rule changes that appear to be widely accepted are and how differing views of what caused the crisis shape reforms.

The new skin-in-the-game rule, says the Securities and Exchange Commission request for comment, "would require sponsors of asset-backed securities to retain at least 5% of the credit risk of the assets underlying the securities and would not permit sponsors to transfer or hedge that credit risk."

Simple, right? Hardly. Opinions vary widely, beyond the fact that most issuers would rather avoid the cost and risk of exposure to their securitized pools. "To be sure, 5% retention would be the simplest approach to implement to encourage improved loan origination underwriting," George Mason University finance professor Anthony Sanders told the subcommittee. "But unfortunately, risk retention appears to be the least useful approach."

Joshua Rosner, a partner with institutional advisory and research firm Graham Fisher & Co. and the author, with New York Times columnist Gretchen Morgenson, of "Reckless Endangerment" about the mortgage mess, argued that the rule would not solve the problem. The theory is, he said, "if a lender or securitizer knows he'll have to drink some of the poison he offers to others, then he'd think twice about creating the poison. But as we saw in the past crisis, the banks in direst need for direct government support found themselves in that predicament precisely because they had swallowed a large portion of the poison they'd sold to others."

Edward DeMarco, the acting director of the Federal Finance Housing Agency, agreed. "Virtually all of these issuers, securitizers and loan originators of these awful mortgages were retaining risk in some fashion because they've virtually all gone out of business," he said. "The managers and owners of the firm have lost their capital."

So what's the solution? Janneke Ratcliffe, executive director of University of North Carolina's Center for Community Capital, argued that providing detailed information about a security's mortgages is as critical as risk retention. "The crisis was a result of abuses that arose in a regulatory vacuum in a climate of inadequate transparency, lack of accountability and misaligned interests," she said. "Lack of transparency in the private-label market enabled adverse selection and underpricing of risk because issuers knew more than investors. Certainly, better loan-level information and product standardization will help usher back in the private market."

Rosner agreed. "I advocate reconsideration of the risk retention rule, but doing so without first addressing the dangerous opacity that remains in the market would only increase risks," he argued.

DeMarco said that regulators recognize that providing more MBS transparency is important. "Enhancing loan-level disclosures on enterprise MBS, both at the time of the origination and throughout a security's life, is on our agenda," he said.

But Rep. Mike Quigley, D-Ill., had a different concern. He urged regulators not to allow transparency to replace oversight. "I think there is likely wide consensus on both sides of the aisle that increased transparency is a laudable goal. However, I would emphasize that increased transparency must not come at the expense of accountability."

Then there are the exemptions. As currently drafted, the rule exempts "asset-backed securities that are collateralized exclusively" by qualified residential mortgages, which the rule defines. The proposal also deems that all securities issued by Fannie Mae and Freddie Mac automatically meet the retention requirement as long as the pair remain in government conservatorship. Federal Housing Administration-issued securities would also be exempt.

Sanders said this is a mistake. "Exempting these players in the mortgage market defeats the spirit of risk retention, since a loan originator will be tempted to sell to or be insured by Fannie, Freddie and the FHA rather than keep the retained risk."

Rep. Patrick McHenry, R-N.C., agreed. "Dodd-Frank does not impose the restrictions on FHA's underwriting standards, leaving the agency in a position of accepting lower-quality mortgages, more or less appearing to defeat the stated intention that this administration has said to reduce taxpayer exposure to the housing market," he said.

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Nicole Duran covers Congress for The Deal magazine.