Key industry players blamed for mortgage mess

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You have heard the complaint: "In our current home loan system, nobody worries about the risk because they pass it on to the next player in the chain. If everyone in the chain had skin in the game -- something to lose if the loan goes bad -- we wouldn't be in the mess we are in now." A long chain of risk transfers is certainly a feature of our housing finance system. In a typical scenario where loans end up as collateral for a mortgage security, a mortgage broker shifts the risk to a wholesale lender, who transfers it to an investment banker, who transfers it to multiple investors. The broker at the head of the chain usually knows the most about the risk, while the investor who ultimately bears the risk often knows the least. Some knowledgeable observers have suggested that the government should enact the following rule: "Every player in the chain must have skin in the game." I think this is a bad idea. Economists term situations where one party makes a ...