Ultimately, the quality of the underlying mortgages will determine how much exposure the government — and, by extension, the taxpayer — takes on. Poorly underwritten loans brought down both the “private-label” mortgage securities industry and the Fannie-Freddie duopoly. Yet a wide array of interest groups, from the housing lobby to low-income advocates, can be counted on to insist that standards be relaxed, bit by bit, in the name of homeownership.
The Johnson-Crapo proposal adopts federal “qualified mortgage” standards that basically rule out “no-doc” loans and the like — but it would also make mortgages with down payments as low as 3.5 percent eligible for government-backed securitization. Congress must resist any temptation to debase credit standards. If recent history teaches anything, it’s this: A mortgage securitization system is only as strong as its weakest borrower.