HERE with the latest amazing argument from Wall Street is, once again, Kevin Drum. "The Fed and other regulators," he writes, "have proposed a set of rules that would put new limits on home mortgages: Borrowers would have to put 20 percent down and would have to show that their mortgage payments would amount to no more than 28 percent of their gross monthly income." A Washingon Post article cites mortgage-industry figures who say this would devastate homebuying, as 3 out 5 buyers last year wouldn't have made the cut. But, as Tom Lawler at Calculated Risk explains, this isn't what the rule means at all. Lenders will still be allowed to make any loans they want to, at any terms. But if their loans don't meet the above conditions, then, when they repackage the mortgages into RMBSs, they have to keep at least 5% of the value of the mortgage on their books, rather than selling off the whole thing. That way they still have some skin in the game, to give them an incentive not to make bad loans and hopefully avoid having American mortgage lenders crash the world economy again.

Personally, I would never buy any house on which I couldn't put down at least a 20% down payment and where the amount of the monthly payments would be higher than 28% of my gross income. But there are two possible schools of thought on this. Either these sorts of loans are risky, or they aren't. If they are, then banks shouldn't be making them except at high interest rates, and they certainly shouldn't be packaging them into RMBSs and selling them off. If they aren't, then banks should be willing to keep them on their books, because very few of them will default. Right?

So what is being argued here? If these loans aren't risky, why do banks have a problem keeping 5% of their value on their books? If they are risky, why should banks be allowed to make and repackage them willy-nilly?

Apparently I just don't understand High Finance.