Bank of America Home Loans

Bankers: Quit selling your loans

January 11, 2011: 5:00 AM ET

There are significant risks when banks originate loans that they don't want to keep on their books. So why do banks persist with securitizing and selling off their loans?

By Eleanor Bloxham, contributor

Despite the risks that loan securitization and sales pose to the financial system, several banks, including Bank of America, continue to oppose requirements that they retain some portion of the loans they issue.

There's a battle going on that goes to the heart of the financial crisis and the way banks will operate going forward. And it all comes down to risk.

Wells Fargo's (WFC) John Gibbons says banks should retain at least some credit risk from most of the loans they originate. I agree, but I'd go a step further.

It's time for banks to rethink the value of holding loans versus selling and securitizing them.

Why? Risk management. The risks associated with loan securitizations and sales are tangible. I've watched financial executives sweat because they originated subprime loans and couldn't get them off their books. I have also participated in economic valuation analyses that showed that when you took into consideration the full risks and costs of subprime loans, a bank was better off not making the loans if it didn't plan to keep them. That's because the risks and costs of the loans are significant. More

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