Don’t Pressure Buybacks

The GSEs and collection of investors have been applying a lot of pressure to Bank of America, Wells Fargo, and others—all potentially liable for billions in toxic mortgage backed securities they sold. Yesterday, at the annual Mortgage Bankers Association convention in Atlanta, a panel of four industry leaders-representing a large bank, a regional bank, and two independent financers-all voiced concern that increased repurchases of bad mortgages would weigh down their operations. One banker even said he has already slowed down mortgage lending because he needs to be absolutely sure he doesn’t have to repurchase these new loans.

One could argue this is a good thing. More accountability certainly isn’t bad. And the banks should have been paying closer attention in the first place.

However, the more bad debt the banks are saddled with, the less they are going to be lending, and that is bad of for the economy. Banks should buy back what they contractually can be shown to be liable for, but not any more. This isn’t a punitive opportunity for the government and there should be no political pressure for banks to buy back any more than they should. This would just hurt the taxpayer (by slowing the recovery) and homeowners as well (by skewing price determiners).