Martin Wolf: We need a mortgage system where banks, lenders have skin in the gam
Posted by: admin in Real Estate and Housing
Filed under: Other issues, Housing, Recession
The ever-incisive FT columnist Martin Wolf offers prudent and timely advice concerning the reforms needed to ease credit market doldrums and right the global financial state of things.
One key practice Wolf would like to see addressed is bank / mortgage lender selling of mortgages they originate.
Designers of the practice had good intentions: It was designed to free-up capital so banks / mortgage lenders could have more money available for future homebuyers. A noble intention.
Unfortunately, as tradition reminds us, the road to perdition (and record housing sector slumps) is paved with good intentions. The problem, Wolf notes, is that the originate-and-distribute model encouraged banks / mortgage lenders to originate (in many cases for handsome fees) high-risk, very-poor-credit-quality mortgages with reckless abandon, because originators knew that the loan would be sold, and its status as a performing asset would be entirely someone else’s problem. Save the best (mortgages), get rid of the rest.
It’s not surprising, Wolf notes, that the originate-and-distribute model became laden with sloppy, irresponsible and even fraudulent loans. Wolf’s reform: originators must be required to retain a portion of the equity of securitized loans. Hence, if / when they go bad, the originator loses money too.
Economic Analysis: Wolf’s proposed financial / bond market reform is on the mark. If every party, including the originator, has a stake in a mortgage’s repayment status, that will lead to higher-quality loans, while at the same time retaining the secondary market’s benefit of freeing-up capital for new mortgages.
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