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Reform on the horizon

Today in The Washington Post, Treasury Secretary Timothy Geithner and National Economic Council director Larry Summers preview their proposed new regulatory regime for the financial industry. The big news on the mortgage front: They vow to require future securitizers of mortgage and other debt to maintain a financial interest in any any instrument they package and/or sell. That measure is evidently intended to restrain them from reckless underwriting – they’ll now have to live with the consequences of excessive risk-taking.

But will they? Mortgage lenders and those who finance them have proven ingenious at offloading risk onto borrowers, through prepayment penalties, fees and so forth, which remain legal within certain bounds and proved toxic to subprime borrowers. Geithner/Summers commit to a financial product safety commission, per Elizabeth Warren’s exhortations, but in a sense they are allowing the toaster factory to keep churning out incendiary devices. I’ll be very surprised if their reform plans actually do anything to rein the practice of offloading risk onto borrowers – and as long as borrowers continue to shoulder the high price, having skin in the game won’t stop securitizers from underwriting destructo-loans.

June 15th, 2009 | Tags: Elizabeth Warren, financial product safety, Larry Summers, prepayment penalties, Timothy Geithner
Posted in A Lot More | 1 Comment »