At the Treasury's Conference on the Future of Housing Finance yesterday, it was pretty clear that government guarantees for mortgages aren't going anywhere. As mentioned before, it's easy to figure out how this story ends. When affordable housing advocates, Main Street, and Wall Street are all on the same page, taxpayers don't stand a chance. So as long as the government continues guaranteeing mortgages through some Fannie- or Freddie-like government-sponsored entity (GSE), it can dictate what kinds of mortgages it will accept. This makes bank risk retention unnecessary for those loans.
A Brief Primer
Before explaining why, here's a brief primer that you can skip if you already know the issues. The Dodd-Frank bill requires that banks have "skin in the game" when creating mortgage securities, in the hopes that they'll originate higher quality loans if they have to eat some of their own cooking. As noted yesterday, this should really be targeted at lenders instead of securitizers, but in either scenario, the desired end is essentially the same: higher quality mortgages and mortgage securities.
The Power of Conforming Criteria
Now, let's assume that the government continues to guarantee some specific segment of new mortgages, which appears a likely outcome after yesterday's conference. In order for lenders to attain that guarantee, it can (and does) stipulate certain criteria that loans must adhere to in order to get its backing. If banks originate loans that don't follow these rules, then the GSE can either reject the loan initially, or put it back to the lender if found to fail the test after-the-fact. So essentially, you have a situation where regulators can ensure that mortgages are high quality -- even without forcing banks to retain some of the risk.