Watch Out for Dodgy Mortgages, Again

We thought the Dodd-Frank financial-reform law fixed all this by requiring securitizers to keep some skin in the game. Under the law, for every dollar of loss suffered by mortgage-backed securities investors, at least 5¢ must be borne by those who securitized the mortgages. In that way, the law aligns the interests of borrowers, securitizers, and investors in making sure mortgage loans are affordable and sustainable over time. Unfortunately, in an effort to get the 60 votes needed under Senate rules to move Dodd-Frank forward, the bill's sponsors agreed to make a limited exception to the skin-in-the-game requirement. The law exempted loans meeting standards so tight that there was little, if any, chance they would default. But as it turns out, that wasn't good enough for the financial and housing industries. They are now arguing for regulatory changes that would allow this exception to swallow the rule.