The White House has unveiled their proposed revamp of financial regulations. One of the changes would require banks and other companies that offer loans to keep 5% of that loan on their books. See, one of the causes of the current financial mess was banks offering loans to anyone, knowing they could turn those mortgages into asset-backed securities and sell them off. This securitization (which I’ve previously covered) let banks and mortgage lenders take the commission and pass the risk onto others. The theory is that people will be more cautious if they can’t dump an entire loan. If it’s their money, they’ll be more careful.
Deutsch says retaining more risk would require lenders to have more cash on hand to cover losses on loans. That could make it harder for banks to lend money, he says. And Deutsch doesn’t think the reform is necessary. He says mortgage lenders’ inherent interest in their own reputations already gives them enough skin in the game.
“Hundreds of mortgage originators have gone out of business because they sold bad products to investors who wouldn’t buy their product again,” Deutsch says.
This is an interesting view of the world, one in which the securitization industry’s role in the recession is the equivalent of your aged incontinent dog accidentally widdling on your new carpet. He can’t help it, and he does feel bad about it! Besides, we all know people act in their best interests all the time!
Waiting for mortgage lenders to go bankrupt if they make bad loans is like waiting for drunk drivers to crash and die — it may eventually happen, but in the meantime they’re liable to do a lot of damage. Securitization let mortgage lenders shovel bad loans out the back door as fast as they were coming in the front, delaying their day of reckoning until it took the whole economy down. It rewarded mortgage lenders not for making smart loans, but for making lots of loans that they could turn around and sell quickly.
It’s nice that Tom Deutch doesn’t see a problem with how things went. But if he’s not willing to cut back on the booze, he shouldn’t be surprised when others are far more skeptical of his and his colleagues’ driving.