Local Knowledge and Mortgage Lending

We should value both: local knowledge as a comparative advantage, and securitization as a form of trade. Local knowledge should yield better performing mortgages, and securitization should facilitate their trade -- to those who want to access this risk and away from those who are too exposed to it (however adeptly proced it is.) The underwriting -> securitization channel can get gummed up by all the same perversions that can gum up trade flows: non-market susbsidies or disincentives affecting the production or demand of the goods, conflicts of interest, fraud, etc. Why don't we work on fixing the latter.

Forget the political consensus; why is there any market demand for these securities?

Let's say you are a local bank and you write a mortgage. If you know you are able to unload the risk, won't that affect your behavior? Can anyone speak to how the market can hold the mortgage originators accountable for the quality of their mortgages, when they probably won't go bad until the next housing recession?

How are local branches and securitization not compatible?

The primary benefit from securitization from a prudent lender's viewpoint is diversification of risk. A local lender may very well have better information about local conditions, but a portfolio of loans highly concentrated in one geographic locale represents risk no matter how skilled the lender.

Now the same benefit can (at least in principle) be realized if the lender is big enough to have a local presence and underwriting skills in every major market of the US. Hello, too big to fail?

There are other benefits from securitization (such as liquidity). The pertinent question about securitization is how much (if any) right of recourse against the initial lender is needed to prevent moral hazard. (The moral hazard, although real, is much less than is commonly supposed given the warranty right to return loans to the original lender for misrepresentation or errors of documentation.)