The previous article in this series critiqued the Obama administration’s proposal for a new federal reinsurance program on the grounds that it did not address the three major structural defects in the current housing finance system: the excessive market power of four mega-banks, the barriers to effective shopping by mortgage borrowers, and the vulnerability of the private secondary market to a contagious loss of confidence. The following is a ramp-up proposal that would deal with these problems.
The major focus is a new type of federally chartered mortgage lender that would lend and securitize simultaneously. I’ll call them "delta mortgage banks," or DMBs, to distinguish them from the kind of mortgage banks we have now (MBs). Both originate mortgages for sale, but there are major differences in how this is done.
–MBs often sell packages of loans, while DMBs sell one loan at a time.
–MBs may hold mortgages for days or weeks before a sale, but with DMBs the granting of the loan and its sale occur simultaneously.
–Sale by an MB, aside from representations and warranties provided to the buyer, terminates the seller’s risk of loss in the event of borrower default; that risk is passed to the buyer. A DMB, in contrast, remains fully liable for the risk of loss after the sale because loans are sold into open-ended bonds issued by the DMB.