Requiring mortgage lenders to hold onto their loans

[sonoranrat]

Originally Posted by mathjak107

if banks had to hold on to these loans wheres the new money loaned out for the future mortgages coming from? they recycle the money by selling the loans, taking a profit on the sale and re-loaning the money

I understand this very well. However, there is a fine balance between increasing liquidity so that enough fully qualified buyers can have access to credit versus the situation where credit is so loose that you needed only be alive (and not even necessarily so) to qualify for huge loans.

If banks had to hold on to all loans for all time, then perhaps it MAY lead to a situation where there is not enough credit even for fully qualified real buyers. But there are other possibilities that I have mentioned.

Banks could be required to, say, hold on to some significant percentage (1/2, 1/3, etc) of the loans. Also banks could be required to hold on to loans for a number of years, say 5 years, before being able to sell them off. Both of these requirements would have the effect of increasing liquidity because they would be able to sell off their loans eventually. But by being forced to hold onto SOME of their loans for SOME period of time they have a great incentive to scrutinize their loans because they would be exposed to some of the risk of bad crappy loans. But so long as banks could offload virtually all of their crappy loans right after they are written, they had no incentive to stop making crappy loans and had every incentive to keep making as many of them as possible.

[Karen59]

okay, I finally found the right forum to post this article.

Would You Pay $103,000 for This Arizona Fixer-Upper? - WSJ.com

It's the story of how a 103,000 mortgage on a little falling down shack was sliced and diced. And, I don't think it was for the land value, because the neighbors eventually ponied up 18,000 to buy it just for the right to tear down an eyesore.

It seems to be a case of open fraud that everyone, including some big banks, just winked at when money was flowing. Who knows how much of this went on, but it does make me feel very bad and also angry.

The slide show is shocking

[Austin-Willy]

Originally Posted by mathjak107

if banks had to hold on to these loans wheres the new money loaned out for the future mortgages coming from? they recycle the money by selling the loans, taking a profit on the sale and re-loaning the money

In addition to sonoranrant's response, with which I agree, it is not a given that having banks act more like mortgage brokers, instead of underwriters, leads to the healthiest system. If you assume that banks cannot sell their loans, the money previously available in the secondary market could very well find other avenues to consumers.

[le roi]

Originally Posted by DMenscha

Mortgage money would have been incredibly hard to obtain if there were no secondary market for mortgage loans. Would it have eliminated the bubble? Probably, but then again almost no one in the US would have been able to buy a home.

Just to play devil's advocate -

If there had not ever been a secondary mortgage market, wouldn't that have severely limited prices?

If the path to home ownership was as simple as: "Save 100% of the money, and buy the house", wouldn't prices reflect that reality? Why would we have less homeownership?