Have You Heard About The 5 Percent Retention Rule?

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

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (Alexander90210.com), he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Alexander90210.com. Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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