The first is to introduce mortgage securities based on the Principle of Balance. GSEs could, and should, do this, with the government regulator setting clear and conservative standards. No legislation is required.
The second step is to open the process so all qualified MCIs can issue POB bonds. To make this market work, this means new law requiring that MCIs maintain skin in the game for any federally guaranteed mortgage.
After that, the GSEs could be phased out from their role as MCIs, and the guarantee function hived off to a government agency. Eventually, the GSEs would be liquidated, as their portfolios run off.
Legislation would also be required to extend the POB system to areas that government insurance does not cover.
In fact, legislation authorizing “covered bonds” is making its way through Congress.
This is based on a system in Denmark in which individual loans become bonds that can be bought back.
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