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>Needless to say, the institution originating the loan ends up disconnected from the risk once it is sold to other financial institutions. In many cases, isn't

by x2f10 7y ago

>Needless to say, the institution originating the loan ends up disconnected from the risk once it is sold to other financial institutions. In many cases, isn't this already the case with the largest consumer loans (mortgages)? If the buyer understands the risks of the consolidated loans, what's the beef? If the bank is hiding the risks, that's another issue - I agree.

robmiller 7y ago
The house is the collateral in a mortgage though.
- suff 7y ago
  The very-very upside-down house...
  - toomuchtodo 7y ago
    Which you have the privilege of holding onto for years after a 12-24 month foreclosure process. “Collateral”.
gibybo 7y ago
>If the bank is hiding the risks, that's another issue - I agree. I think the point is that this creates a lot of incentive for the bank to hide the risks that they wouldn't otherwise have. Perhaps more importantly, it doesn't incentive them to prioritize things that might help them measure the risk better, so those sorts of improvements never get made and it just deteriorates over time.
logicalmind 7y ago
The loan originator has a different risk calculation when their ultimate intent is to offload 90% of the loan(s). Some might say it would be in their own financial interest to minimize the amount of due diligence involved in determining whether to give such loans. Plausible deniability. From a buyer's perspective, they receive the due diligence that the originator provided. There are various risk models put in place with that information, but they are also "insured". These are the same fundamentals that led to the 2008 crisis. Giving loans to people who weren't actually qualified. Miscalculating the risk, intentionally or not. Buyers ok with the risk, assuming the insurance would come through in the worst case. If there is an event, or a series of events, that cause these loan takes to become insolvent, say losing jobs with no hope of getting a new one (truck drivers being replaced with self-driving trucks?), that would cause large amount of loan defaults...
- cm2187 7y ago
  Except the 90% is not a vertical slice, it is horizontal. I.e, the first 10% of notional in losses on the whole portfolio goes back to the originator. The profit on the transaction would have to be huge for this not to realign the incentives.

by x2f10 7y ago

robmiller 7y ago

The house is the collateral in a mortgage though.

suff 7y ago
The very-very upside-down house...
- toomuchtodo 7y ago
  Which you have the privilege of holding onto for years after a 12-24 month foreclosure process. “Collateral”.

gibybo 7y ago

>If the bank is hiding the risks, that's another issue - I agree. I think the point is that this creates a lot of incentive for the bank to hide the risks that they wouldn't otherwise have. Perhaps more importantly, it doesn't incentive them to prioritize things that might help them measure the risk better, so those sorts of improvements never get made and it just deteriorates over time.

logicalmind 7y ago

The loan originator has a different risk calculation when their ultimate intent is to offload 90% of the loan(s). Some might say it would be in their own financial interest to minimize the amount of due diligence involved in determining whether to give such loans. Plausible deniability. From a buyer's perspective, they receive the due diligence that the originator provided. There are various risk models put in place with that information, but they are also "insured". These are the same fundamentals that led to the 2008 crisis. Giving loans to people who weren't actually qualified. Miscalculating the risk, intentionally or not. Buyers ok with the risk, assuming the insurance would come through in the worst case. If there is an event, or a series of events, that cause these loan takes to become insolvent, say losing jobs with no hope of getting a new one (truck drivers being replaced with self-driving trucks?), that would cause large amount of loan defaults...

cm2187 7y ago
Except the 90% is not a vertical slice, it is horizontal. I.e, the first 10% of notional in losses on the whole portfolio goes back to the originator. The profit on the transaction would have to be huge for this not to realign the incentives.