Yesterday, I mentioned that the administration, as part of its big regulatory overhaul, wants to require “the originator, sponsor or broker of a [mortgage] securitization to retain a financial interest in its performance.” Today, administration officials are putting out some pre-rollout spin on why they think that’s necessary:
The administration concluded that securitization encouraged looser lending standards, because companies that sold loans to investors had little reason to care whether borrowers could repay those loans. Furthermore, employees were paid to make loans, but they were not penalized for defaults. And investors could not easily check the excesses because they lacked basic information about the contents of each security.
The result? “A serious market failure that fed the housing boom and deepened the housing bust,” according to Treasury Department spokesman Andrew Williams. [emp. added]
Let me get this straight: Fannie and Freddie, the biggest buyers of the top tranches of subprime-mortgage backed securities at the height of the boom, the companies that made the market for these securities, didn’t know what they were buying? I know something I’m not buying.