Frank Bill Seeks to Limit Mortgage Securitization

March 6, 2009 No Comments »

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U.S. House Financial Services Committee Chairman Barney Frank wants to limit how much banks can securitize when repackaging mortgages on the secondary market, according to a Bloomberg report.

During a briefing in Washington yesterday, he told reporters it should be illegal to “securitize 100 percent of anything,” adding that those who securitize loans should be required to take into account a borrower’s ability to repay the mortgage.

He is reportedly working on a piece of legislation that would require mortgage lenders, banks, and bond investors to retain some credit risk on the mortgages they securitize into complex financial instruments.

Frank noted that the practice has played a large hand in the ongoing mortgage crisis, as many originators really had no skin in the game, much like those who took out zero down mortgages.

The so-called “originate-to-distribute” model, which became widely popular in recent years, promoted risky lending because banks only had to hold onto loans for a brief period of time before dumping them on the secondary market.

That meant the risk was being passed quickly, so banks were more interested in writing new loans than looking at the quality of the loans they wrote.

At the same time, they were encouraged to originate more loans thanks to volume-based incentives that weakened underwriting standards, allowing an enormous number of bad mortgages to funnel through the system.

The changes Frank seeks may be part of a larger bill that would create a new financial regulator with more authority to curb systematic risk; they want to introduce it at the G-20 summit early next month.

Frank also plans to introduce a predatory lending bill, along with a bill aimed at curtailing credit card industry abuses deemed harmful to consumers.

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