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* Law allows risk retention stake to be lowered
* Bair defends FDIC action on "safe harbor" rule
By Dave Clarke
WASHINGTON, Oct 5 (Reuters) - U.S. banking regulator Sheila Bair on Tuesday sought to downplay concerns that a new requirement that issuers retain a stake in asset-backed securities will hurt the securitization market -- a market seen as critical for the housing market's recovery.
Under the financial regulatory overhaul law enacted in July, banks and other issuers of securities backed by such things as mortgages or other consumer loans are required to retain a 5 percent ownership interest in the loans.
Bair, chairman of the Federal Deposit Insurance Corp, said in an interview with CNBC that this stake could be lowered or even eliminated, in the case of qualified residential mortgages, if the underlying loans meet yet-to-be-written underwriting standards.
She said regulators would work swiftly to get these new underwriting standards in place.
"I think if they don't like the 5 percent, let's work expeditiously to get these new lending standards in place," she said.
Regulators have about seven months left to write regulations implementing new risk retention requirements.
"We would be happy to eliminate it, again, if there are good strong lending standards, good strong definitions of qualified residential mortgages, which the agencies agree to," Bair said.
Last week the FDIC took some flak from industry and fellow regulators for putting in place a regulation that provides "safe harbor" for securitizations in the event a failing bank is seized by the agency. The regulation includes a section on risk retention.
The American Securitization Forum, an industry group, said the FDIC should have waited for the broader risk retention rules envisioned by the new law to be completed before moving forward.
Bair has defended the decision noting that the regulation includes a provision that would give precedence to the interagency rule when it is finalized. (Reporting by Dave Clarke, Editing by Dave Zimmerman)