Housing Finance Reform

The definition of a Prime mortgage is one that Fannie and Freddie would buy and securitize. So how exactly does limiting securitization to mortgages that Fannie and Freddie would buy allow you to eliminate them?

The law/ rules for Fannie& were changed so that they could also invest in sub-prime, Alt-A.

Along with private securitization, which might not evolve, there needs to be more concern about regulations on Tier 1 capital and AAA rated financial products.

If other rules aren't changed, and the agencies rate some "20% down payment" mortgages bundled into a securitized product as AAA, such product will be invested in by banks.

Does the above constitute "government support"? Sort of, maybe, maybe not.

The evolution of the market will be determined by what is rated AAA by the rating agencies, and what products are allowed to be counted as "money" for capital reserve requirements.

"Our alternative approach is to ensure that only prime quality mortgages, which comprise the vast majority of US mortgages, are allowed into the securitization system. "

I think if the rating agencies would properly examine and then honestly rate the mortgage pools, then only prime quality mortgages would be securitized. No one would invest in subprime junk if it didn't have that AAA seal of approval.

I think that a healthy mortgage market is a market regulated by itself, given that consumer have all the necessary and quality information about the market to make quality decisions that will enable them to be financially stable in the long term. Government sponsored institutions should make sure that nobody is cheating and that home buyers are informed well. Securitization is a good think as long as the securitizators are not greedy too much and don't take up trashy loans for their securities, which implies banks that don't cheat on lending standards and fail to do proper paperwork.