With only 16 bank failures so far this year, 2013 is on pace to
have the lowest number of bank failures in five years. Is this
relative stability causing some regulators to miss the action and
excitement of the banking crisis?
That question is raised by a new government proposal that aims
to loosen restrictions on the securitization of mortgage debt --
restrictions that were put in place to address some of the worst
excesses of the housing boom.
Securitization of mortgage debt allows banks to treat mortgage
risk like a hot potato -- or perhaps more like a hand grenade that
gets tossed around until it blows up. Basically, securitization is
the process by which banks bundle mortgages into securities and
sell them to other people.
In the wake of the housing crisis, banks were required to retain
a certain portion of their loan portfolios, so they would share in
the risk. Presumably this would make them more responsible about
which loans they approved. There were already exemptions to this
requirement for most conventional loans, and now some regulators,
including representatives of the Federal Reserve and the FDIC, want
to loosen requirements for participation in riskier loans as
Banks responded to the mortgage crisis and the regulations that
followed it by tightening underwriting standards. Those who
advocate loosening securitization restrictions argue that doing so
will support the housing market and make mortgages available to the
wider segment of the population.
Impact on consumers
As quoted in the Wall Street Journal, former FDIC chairman
Sheila Bair said the proposal to loosen securitization restrictions
indicates that Washington has "lost its political will for serious
But reversals like this are not unusual after a crisis has
passed. As business improves, people forget the practices that got
the industry in trouble in the first place, and start to chafe at
anything that restricts them from doing more business when times
As for the housing market, it doesn't seem to be suffering from
a lack of support. Housing prices recently enjoyed a record monthly
rise, and have regained their levels from 2004. What followed from
there were the peak three years of the housing bubble. Do those who
want more support for the housing market really want to see prices
regain those dangerous heights
Current mortgage rates
, though higher than a few months ago, still enjoy the
extraordinary intervention of the Federal Reserve to keep them low.
It would be a raw deal for consumers if banks retained tighter
standards when rates were low, only to loosen them when rates rose.
Meanwhile, loosening those standards would put savings accounts and
other deposits at greater risk, even though savings accounts have
yet to see their interest rates follow mortgage rates upward.
The housing collapse and subsequent banking crisis was a bad
deal for consumers the first time around. It would be a bad deal
for them again if permissive regulators manage to engineer a repeat