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In a Reuters article about the mortgage mess, Treasury Secretary Henry Paulson blamed a "dramatic weakening" of underwriting standards for lower-quality home loans for helping trigger turmoil in credit markets. Interesting. Didn't this Johnny Come Lately say late last summer that the crisis was contained to sub-prime?

Now he knows the solution:

"Among recommendations from a top-level Presidential Working Group that he heads, Paulson said he wanted "strong nationwide licensing standards" for mortgage brokers as part of an effort to ward off future housing crises and reassure investors"

Licensing standards for brokers? Really? How about changing the way brokers are compensated? As a broker, your only concern is getting the deal closed, no matter how bad the deal is. Rather than paying brokers up-front, pay them a small recurring fee every time the borrower makes a payment on the loan. That way, brokers have a stake in only pursuing good deals. Problem solved!

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How about a simpler solution: prohibit the practice of providing mortgage loans? We can them shut down the mortgage industry, send these parasites to dig trenches, and buy houses for what they should cost.
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Brilliant solution!   In addition though, I would recommend that standards be established where the homeowner has to have some skin in the game.    This would slow the jingle mail.   20% of the loan value in cash, old time hockey.
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Good idea.  I'm sure some joker will take that recurring fee and securitize it, though.

 Paulson: Hey buddy, thanks for the lame suggestion, how bout trying to fix our dollar?  

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Paulson is one of the largest shareholders of GS. So the question becomes, what is in the best interest of GS. That is what I would guess "we" as a nation will do.

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A simpler reform would be to require banks to keep at least part of any mortgage they finance on their books.  Then they would actually care about the underwriting standards.  As long as the banks could securitize all their loans and get them off their books, booking fees for making the loans and for securitizing them, as well as a profit for selling them for securitization, then they had no skin in the game on how the loans performed, as they were no longer their problem.  (Not on their books, not their problem.)  In the past, the banks kept and serviced the loans that they funded, so they cared about underwriting standards and whether or not the borrower could repay the loan.  This change has been one of the biggest disconnects that caused this whole mess.

You could also require anyone that securitizes a bunch of loans to keep 10% or so of the value of the security on their books.  This would force some of the investment banks to care about the performance of the loans, instead of just the size of the fees they could get for securitizing the loans.   Also, if they had to keep the stuff on their books, they might have been a little more reluctant to set up highly leveraged CDO's.  Finally, it seems like they shouldn't be allowed to short the securities they are selling as AAA-rated, investment-grade securities, (as GS did and made a bunch of money doing so).  

If everyone involved in the mortgage transaction, (borrower, bank, broker), was forced to have some skin in the game, then a lot of this mess would never have happened, as people would have paid more attention to the contracts, how they were written and whether or not the loans would ever be repaid.

Just my opinion.

Craig 

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