One of the factors blamed for the meltdown in the real estate market
in 2007 and 2008 was agency costs. Prior to that period, banks and other
mortgage issuers would issue a mortgage to an individual, then
immediately sell the entire mortgage to a company that would package
mortgages and sell mortgage backed securities (MBSs) to bondholders. The
agency costs arose because the mortgage and MBS issuers had no "skin in
the game," meaning that if the borrower defaulted, the they did not
take a loss. As a result, some mortgage issuers issued mortgages to
anyone with a pulse since the issuer would not take a loss if the
borrower defaulted.
Due to this agency cost,
regulations were put in place to require mortgage and MBS issuers
maintain skin in the game, meaning that if the borrower defaulted, the
mortgage and MBS issuers would both share in the loss with bondholders.
Six U.S. regulatory agencies have proposed that the regulations be loosened
to allow banks and MBS issuers to reduce their exposure to mortgages
that meet less stringent requirements. Under the new proposal, mortgages
that meet a minimum standard from the U.S. Consumer Financial
Protection Bureau will not require banks and MBS issuers to retain
interest in the mortgage.
