December 14, 2013
The Washington Post ran a piece implying that new rules on mortgage issuance will exclude large numbers of potential homebuyers from the market. The piece fundamentally misrepresented the issues. The rules cover the mortgages that can be placed in mortgage backed securities without banks being required to keep a 5 percent stake.
If a bank believes that a mortgage is in fact a good mortgage, in spite of not complying with the rules, then keeping a 5 percent stake carries minimal cost. Furthermore, banks have typically held 10-20 percent of their mortgages. If they consider a mortgage to be a good mortgage, then they would not mind holding it as an asset for the life of the mortgage. It is likely the case that mortgages that do not comply with the new rules will carry a higher interest rate, but that is appropriate for mortgages that face a higher risk of default.
In short the real issue here is simply that higher risk buyers are likely to pay higher interest rates on their mortgages. This is what would be expected in a market economy.
Comments