Congress finally is taking early steps toward correcting one of the contributing causes of the credit meltdown: Many banks willingly approved mortgages regardless of risk.
Currently we have what amounts to an “underwrite and sell” system, in which banks endorse mortgages and quickly sell them to Fannie Mae and Freddie Mac. That creates more money for mortgages, but it shifts the risk of default to taxpayers.
Some lawmakers are pressing for a system now used in Europe called “covered bonds,” in which banks retain mortgages on their books and issue bonds backed by those loans.
Proceeds from the bond sales provide money for more loans while creating a new market for financing mortgages. But unlike the current system, banks would exercise more care in making loans. They would have more “skin in the game” because they would hold the mortgages on their balance sheets.
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