Whether this logic is accurate or not is a topic for a different blog entry (hint: look at the losses the financial institutions suffered on their retained book of business).
What is true though is that skin in the game is complementary to and not a substitute for investors knowing what they own. As discussed in earlier posts using the Brown Paper Bag Challenge, for investors to have the information that they need 'when' they need it to make a buy, sell or hold decision on an individual structured finance security requires that they are provided with observable event based reporting on the underlying collateral performance.
If a mortgage does not provide observable event based reporting to investors when it is included in a structured finance security, no mortgage should be considered a qualified residential mortgage.
Under the Dodd-Frank Act, regulators have been given the responsibility of defining what is a qualified residential mortgage. Qualified residential mortgages are exempt from the Dodd-Frank issuer retention requirements when packaged into structured finance securities.
The Wall Street Journal featured an article that describes how both investors and issuers would like the regulators to define qualified residential mortgages.
Investors favor a limited definition of a qualified residential mortgage. These mortgages would have high down payments, say 20%, and fixed interest rate payments.
Issuers favor a broad definition of a qualified residential mortgage. These mortgages would have lower down payments and private mortgage insurance. They could have fixed or variable rates including teaser rates.