While Qualified Mortgage and Qualified Residential Mortgage Rules are designed to increase mortgage quality, investors must be cautious about privately issued securities in a post-GSE era where the underlying loans are subjected to a particular lender’s underwriting and sourcing processes.

Private-label securitization exposed investors to both borrower credit risk by way of significant relaxation of underwriting standards and a more insidious lender process risk. It was only a matter of time before poor loan manufacturing processes ill-equipped to handle riskier loans would lead to heavy losses for investors. With momentum building in Congress for a dominant role for private issuers in mortgage secondary markets, controls must be designed into any new securitization process to mitigate excessive exposure to lender process deficiencies.

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