Comments on: The anti-risk-retention lobby’s bizarre logic

By: Strych09

Strych09 — Thu, 02 Jun 2011 17:46:05 +0000

What jomiku said. Felix’s unexamined premise is that if the 5% retention rule goes into effect, unchanged, over the bankster’s objections, that they’ll necessarily be “forced to be honest about their underwriting”. I’m not nearly as sanguine.

The way to force better underwriting is to do so directly. Regulate that area of activity with clear rules and standards, backed up by random, intrusive audits. If greedy banksters with their eye on this quarters bonus check are found to have violated the standards, then file civil lawsuits and/or criminal actions against them as individuals.

By: klhoughton

klhoughton — Thu, 02 Jun 2011 16:00:43 +0000

5% retention is a very small amount. The old standard was closer to 20-25% being kept “on the books,” just because of the cashflow issues of securitized mortgages (most especially–as has become a problem now–that the servicer continues to make payments as if they came in on mortgages that are slightly delinquent).

By: jomiku

jomiku — Thu, 02 Jun 2011 14:23:16 +0000

The idea of keeping skin in the game may, of course, backfire because banks will continue to make loans that go bad and they’ll now have more of that on their books. Just pointing out it seems impossible to craft to a genuinely effective system. If I were a bank, I’d be more interested in what I can do with the value on my books. Can it be used to offset other capital requirements? Can its value be used to make my books look better than they are?

By: Beezer

Beezer — Thu, 02 Jun 2011 14:19:06 +0000

I can’t recall exactly who pointed this out, it may have been Elizabeth Warren, but mortgage brokers and securitizers didn’t want mortgages insured because, on average, it opened up as much as 95bp in profit on a mortgage.

Hey, it’s all about booking a commission today isn’t it, and forget you once it’s in their checking account?

Bring back some form of insurable interest. Lending banks need to have some skin in the game up front, if for no other reason than the next time they collectively screw the pooch, that’s 5% taxpayers don’t have to insure.

By: AndyGarbage98

AndyGarbage98 — Thu, 02 Jun 2011 14:18:53 +0000

Is 5% enough to prevent the mortgage mess from reoccurring?

I thought the ABS originators made enough money off each issue to simply write-off the 5% they’d end up holding.

I could imagine them holding back either the *best* 5%, or the *worst* 5% depending on whether the market was chasing safety or yield.

By: winstongator

winstongator — Thu, 02 Jun 2011 14:02:31 +0000

You could go a lot further. Say the cost of that 5% is 10% not 5.05%. An extra 5% interest on 5% of the loan would be $47/month. Granted, a lot more than $1/mo, but still not a prohibitive cost.

No bank would need 10% to hold the loan either…

By: dWj

dWj — Thu, 02 Jun 2011 03:41:27 +0000

If the new regulation doesn’t “withhold credit” from anyone who would otherwise get it, it isn’t working.