There’s no demand to buy stocks or bonds backed up by American mortgages.
As long as the mortgage securitization market remains moribund, lenders won’t have money to lend for mortgages.
Currently Fannie and Freddie back up 95% of new mortgage loans, meaning there would be almost no new mortgage loans made if it were not for the government backing them up.
Regulators and politicians are not at a loss however. They have solutions. They want lenders “to have a skin in the game.”
When the mortgage securitization market collapsed amid a flood of defaults and foreclosures — many of them on loans that should not have been made — the cry arose for lenders to have “skin in the game.” To properly align incentives, the argument went, those who make loans must suffer if the loan goes bad.
That principle was enacted by Congress last year in the Dodd-Frank law, but the mortgage industry managed to persuade legislators to insert an ill-defined loophole that would allow at least some mortgage loans — and perhaps nearly all of them — to escape the requirement that banks retain at least 5 percent of the risk.
Now it is up to an unwieldy council of regulators to set the parameters of that loophole. They will do that by defining the term “qualified residential mortgage.” If a loan is a Q.R.M., as bankers now refer to such loans, then it can be sold to investors without the lender retaining any risk.
Much of the banking industry has been pushing for an expansive definition that would leave few, if any, conventional loans subject to the skin-in-the-game requirement. To hear them tell it, there is virtually no way that any bank would make a mortgage loan at a reasonable rate if it had to share in any losses.