Aftermarket Needed for Bank Loans

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Aftermarket Needed for Bank Loans

A secondary-market facility for all bank loans would be an excellent way to give much-needed credit to the U.S. economy without a great amount of further risk in banks' loan portfolios.

Such an entity should be run on banking safety and soundness principles and provide for examination procedures analogous to those used for mortgage loans traded in the already existing secondary market.

If a special bank or entity were to be created, management and a regulator would have to be picked. The latter decision would require considering whether the new entity should have its rules made by an existing agency or a newly created entity similar to Fannie Mae or Ginnie Mae.

Information Disclosure

Difficult problems are involved in getting a bank to disclose information about its loan receivables to a secondary-market participant -- without violating confidentiality or disclosing trade secrets. Yet enough data must be disclosed to let it package and reoffer such loans in the market.

Nevertheless, loans extended by a bank meant for a special secondary market could be granted on the basis of meeting information, performance, collateral, and guaranty requirements geared to packaging needs.

Granting such loans would be more involved and time-consuming for the borrower than commercial loans have been. The lending process would also involve more safeguards and giving of information. At least, however, credit would flow more reliably and steadily.

Shifting credit risk beyond a small group of shareholders and the lending bank's depositors to the wider group of ultimate purchaser-investors in loans on the secondary market spreads the risk and facilitates new financing.

Attracting Investors

Bundled non-home-mortgage loans have been marketed in the form of asset-backed securities, but the Securities and Exchange Commission issues involved in this forum must be considered. An organization similar to Fannie Mae or Ginnie Mae might present fewer such issues and be more attractive to the investor.

A venture capital fund should be created for this purpose, if no federal or state money is available. Credit should be standardized and conformed to rules like those of Freddie Mac, Fannie Mae, and Ginnie Mae. Even if such a secondary market is generated with the help of a venture capital fund separate from government, permission should be sought to coordinate these entities' rules and safety and soundness procedures.

Thus, though no taxpayer dollars would be involved, the imprimatur conferred by standards that conform with those agencies' could help improve the creditworthiness of loans meeting the program's guidelines and reduce the credit risks to lenders.

The result could be an expanded base for funding enterprises in this country, and that could maintain a strong America.

Loans under such a regime could be standardized for resale with guidelines and limits analogous to those of present secondary-market entities.

Borrowers that meet the most stringent lending guidelines could get more attractive repayment packages in the form of lower interest rates, fewer points, less loan insurance, and less onerous documentation and periodic reporting requirements.

Similarly, loans with a higher level of collateralization could get more attractive credit terms. These standardized loans conforming to specific, risk-minimizing requirements and procedures would probably be more marketable.

Questions of retroactively applied rules and liability for later standards would have to be answered before such a market could be created, however. …