Sometimes The Old Ways Are Better

November 6, 2009 by · Leave a Comment
Filed under: Bond Regulation 

The underlying problem with many of the multi-obligor bonds – those that include home mortgages – is that the housing market collapsed. It’s easy to see all the warning signs of the implosion in retrospect, and it is just as easy to point fingers at those who were instrumental in helping to blow up the bubble—mortgage brokers, home ownership advocates, developers, real estate agents – the list is long.

So is there value in ensuring that these “junk loans,” those that put people into homes they could never afford, are removed from the market? Expunged so that bad loans never make it into multi obligor securities? Absolutely.

There are two ways to accomplish this.

The first is wildly inefficient and compels homebuyers to exercise self-restraint, to forgo the home of their dreams and to get the home they can afford instead. It also expects homebuyers to understand what it is that they can afford given the complex mortgages that they have available. Moreover it also obliges that all the homebuyer-facing players (real estate agents, mortgage brokers, etc.) forgo their natural inclination to maximize their income and to push the buyer into the most expensive piece of property they can.

The other way is simpler. It was the way loans were written not long ago. The mortgage issuer makes certain the homeowner has a down payment he or she doesn’t want to lose and they have the resources to pay back the loan. To ensure this happens, the issuer needs to suffer a loss for loans that go bad. Until this responsibility is re-established, bad loans will be forever finding their way into the markets.

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