Bankers are warning of bankruptcy if this new law is enforced.
What’s going on here?
One of the major reasons for the housing crash was that people selling mortgage loans had little incentive to see that such loans were repaid by borrowers. There was a disconnect. Lenders would make loans and then sell them. These loans would be repackaged and repackaged and people buying bonds backed by such mortgages had no way of knowing how reliable and safe such investments were. They had no way of knowing the likelihood of these mortgages getting repaid.
Dean Baker posts:
The bankers are warning of Armageddon if a rule from the Dodd-Frank bill is left in place that requires that retain a 5 percent stake in mortgages where the owner puts less than 20 percent down. In effect, that if the bank sells a loan into a security pool that had a downpayment of less than 20 percent, it will be liable for at least 5 percent of the losses incurred on the mortgage if there is default.
While the bankers are portraying this as an ominous restriction that will prevent them from making loans to moderate-income homeowners, a little arithmetic suggests otherwise. Before the bubble, Freddie Mac estimated that its average loss on a foreclosed property was 25 percent of the mortgage’s value.
If we assume that the mortgages in question will have the same 25 percent loss rate once the market becomes more normal, then this would imply a loss of 1.25 percent of the mortgage’s value, given the bank’s 5 percent stake. If one in ten of these mortgages go bad, then this implies an average loss of 0.125 percent on loans in this category.
Read more: http://www.businessinsider.com/applying-arithmetic-to-the-mortgage-5-percent-retention-rule-2011-6#ixzz1O5RHxAGD