Talk about poetic justice — one of the primary culprits in the derailing of the mortgage industry was the packaging and marketing of mortgage loans as mortgage-backed securities. These were classified as safe by many investment ratings firms but as it turned out few investors had any idea of what they were really buying — until their investments went belly up. This confusion allowed lenders to make increasingly risky and imprudent loans as long as they could be sold. And now Lewis Ranieri, credited by many for the creation of mortgage-backed securities, is himself in hot water over these investments. His own company, Franklin Bank, is in serious trouble, with tumbling asset values, non-performing loans, and disclosure and audit issues that prompted an SEC inquiry and forced at least one senior manager into early retirement.

If the guy who created the system can’t deal with it you know it’s time for a do-over. The problem with the current system is that the originators of mortgages have been able to offload a large part of their risk onto unsuspecting investors, in some cases by bundling less desirable riskier loans together with solid projects and selling the whole thing as a safe investment. Well, now investors are skittish (fool me once….) and sometimes even loans once considered “no-brainers” are impossible to get done these days. For example, a borrower moved into town with a nice chunk of cash and found the perfect home. He offered to put 50% down but needed a no-doc loan because he hadn’t found a job yet. The guy has perfect credit and enough money in the bank to keep going for two years even without a job. No lender will touch this deal. However if this guy had a job, a credit score as low as 580, and only 5% down he could probably get an FHA mortgage. That’s because the risk isn’t born by the lender, it’s born by….drum roll please…US! Taxpayers and insurers will bear the brunt of the fallout if this loan goes bad, so lenders are more than willing to make this loan. Yet I know if it was my own money which loan I’d feel safer doing…