From the Wall St Journal, print version, Tuesday March 30, Page B1. "Securities Debate is All About Trust". Mortgage backed securities are paper IOU's issued by banks. The banks claim the IOU's are "backed" by home mortgages, implying that the buyer of the IOU is buying something as sound as a home mortgage. In 2007 the marks discovered that the mortgages "backing" their IOU's were in default. They wised up and few to no mortgaged backed securities have been sold since.
The banks obtained the mortgages used for "backing" by purchasing them from the likes of Country Wide (home of Angelo) and other mortgage dealers. The mortgage dealers started to give mortgages to anyone who walked (or was dragged) in the door. "Ninja, No Income,No Job or Assets" mortgages became common. The dealer's sold these fraudulent mortgages to the banks for real cash. The banks "backed" their IOU's and sold them to "investors" or in ordinary language, suckers. The vast number of Ninja mortgages caused the crash in housing prices that triggered off Great Depression II.
Currently, the Administration and Congress want to require banks playing the IOU game, tohold onto 5% of the IOU's created, skin in the game, to give a small incentive for the banks to deal honestly. The banks are whining that 5% is too much and will ruin the market.
What ought to be done is to prevent the sale and trading of mortgages at any level. Banks issuing mortgages retain 100% of the mortgage on their books. None of this wimpy 5% stuff. This way the loan officer granting the mortgage, the only individual who actually understands the risks, who has interviewed the borrowers, checked with their employer[s], and inspected the property, has some incentive to do it right. If the bank owns the mortgage for it's full life, then it will be diligent and grant mortgages only to those who will pay them back.
Decent home mortgages are very sound investments. The homeowners are strongly motivated to keep up on their payments. Assuming a proper evaluation of the property, the mortgage is secured by valuable real estate. "Safe as houses" is the old cliche. Ninja mortgages are a scam.
The mortgaged backed security business caused Great Depression II and we need regulations to prevent it from happening again. Nearly two years have gone by and nothing has been done, AND the things proposed to be done are too wimpy to do any good.