Skin in the Game
Judging the quality of loans is a traditional responsibility of banks. This function was abandoned when securitization (packaging) of mortgage loans created a new product that banks could sell like soap flakes. Banks took their fee and passed the package along to the next fee charger with no residual responsibility, corporate or financial. This is an example of a “perverse incentive” that motivates bankers contrary to the mission of quality loans.
A solution is to require the originating bank to keep 20%. If the loan goes bad the banks get a hit on their profits because they have:
Skin in the game.