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A Flaw in New Rules for Mortgage

[New York Times 2011-03-31] A Flaw in New Rules for Mortgages by FLOYD NORRIS.

If you want to get the government out of financing normal home mortgages, you have to find a way to bring in private capital — and on terms that do not make government-guaranteed mortgages a clearly superior product.

That fact was central to the Obama administration’s proposals to fix the housing finance market a couple of months ago, but it seems to have been forgotten by a collection of regulators that proposed rules this week on when banks will not have to retain risks for loans they make.

Perhaps inadvertently, they gave Fannie Mae and Freddie Mac, the government-run housing finance agencies, another competitive advantage. That is exactly the opposite of what needs to be done.

The proposals are generally good. They force lenders to shoulder some of the risk when they securitize all but the safest mortgages. That is what the Dodd-Frank law required, and for good reason. One of the big problems we had leading up to the crisis was that many lenders believed they could profit by making loans while leaving others to suffer if the loans went bad.

But where is that risk to be retained? The law says it should be retained by lenders or securitizers; an unwieldy group of regulators is left to fill in the details. The regulators are also supposed to determine what constitutes a “qualified residential mortgage” — one that is so safe that the lender need not retain any of the risk.

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