"The underwriting of risk in the past few years has of course, not been too good". Ethan Penner writing in yesterdays Wall St Journal op-ed page. "Yet the outcry for systemic fixes from various constituencies has been dangerously off the mark. " "Another is to move away from securitization and and return to a portfolio lending model-- where for example the bank originating the mortgage keeps it (in its own portfolio of assets) rather than selling it to a third party (as in securitization). "
" The argument in favor of portfolio lending is based upon the notion that, unlike securitization, portfolio lending incorporates the discipline of 'skin in the game.' Since in the portfolio lending model, the loan's risk is not being transfered from the originator/lender, the underwriters will therefore be more careful."
Mr. Penner goes on to argue in favor of securitization of mortgages, which is what killed a lot of Wall St players in the last few months. At the end of the Op-ed piece, the Journal's editor notes
"Mr. Penner helped pioneer the application of securitization technology to real-estate finance as CEO of Nomura Capital".
In short, Mr. Penner made a lot of money creating mortgage backed securities, which have caused the credit crunch and may push the US economy into recession. Is such a man believable?
The trouble with mortgage backed securities is that no one (except perhaps the originator) as any idea of the risk involved. No bond rating agency can predict the probablity of the home owner failing to make his mortgage payments on time.