It's arithmetic.
Would you rather have 8%, 9%, 10%, and 11% residential mortgages?
It's all about securitization (standardization) and Dodd-Frank requiring the originator to retain an interest, perhaps 5% if it goes bad. This is an albatross after the 2nd year, so I'm not surprised to see a work-around after 12 months, with the carrot of having paid 12/12 on time. The banks will hedge default risk for 1 year and the GSEs will hedge default risk of "seasoned" mortgages or develop their own metrics on what and how much to hedge.
Obviously, they hedged wrong in 2004-2008. They must have hedged interest rate risk, thinking interest rates could rise while they held fixed rate mortgages. That should be on the regulator, but he was Bush's boyhood friend.
There's nothing wrong, and many good things with a liquid, MBS market. We have it for credit card balances, we have it for car loans, and if we wouldn't have it for mortgages, home prices would fall or rise in price slower. Banks want to close GSEs, so consumers should want to keep them, if they properly manage risk and hedge for what they cannot handle with their own balance sheets.
Yes, this too was Bush's fault. |
