Finance & Loans

Securitization of your mortgage

When we need a loan to buy a home, we go to our bank to initiate a loan. Since most of us do our banking locally, the obvious place for a loan is the bank. Many banks have branches in many states and therefore, they are called national banks. In addition to all other loans such as equity lines and business loans, they do lend money to purchase homes. But many banks don’t keep your loan with them. In order to share the risk and to make money available to lend to others, they securitize mortgage loans and sell to investors.

Here comes Dodd-Frank Act that came into effect as a result of the recent financial trouble and near collapse of the housing market. It requires a bank to retain at least 5 percent of a mortgage loan rather than securitization of the entire loan. Banks heavily lobbied against the new requirement arguing that less money will be available for mortgages due to the retention requirement.

The Federal government writes regulations to implement Dodd-Frank Act among other things. However, year has passed without any guidelines to implement the new requirement. Arguments for pros and cons for implementing the new requirement under the Act are plenty.