Former FDIC Chair Sheila Bair and former Rep. Barney Frank, D-Mass., are joining forces to do battle against efforts to weaken post-housing crash restrictions on mortgage securitizations.

Shoddy mortgage securitization practices, generally regarded as one of the powder kegs that set off the financial crisis in the first place, were supposed to come to a screeching halt with the passage of the Dodd-Frank financial reform law.

Under the Dodd-Frank Act, "for every dollar of loss suffered by mortgage-backed securities investors, at least 5 cents must be borne by those who securitized the mortgages," they wrote. However, the law exempts "loans meeting standards so tight that there was little, if any, chance they would default."

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In an article for Fortune, Frank and Bair wrote that regulators must beware of fresh efforts by the financial and housing industries to blunt the securitization rules.

"Instead of loosening standards to appease the industry, regulators should make it virtually impossible for securitizers to escape having skin in the game," they maintained.

"Securitization's skewed incentives transformed home ownership from the American dream to a Brothers Grimm nightmare. We need to make sure it never happens again.

Securitization schemes during the housing bubble meant that mortgage bundlers were paid up front, so they had heavy incentives to generate volume with little regard to whether homeowners could afford a mortgage, Frank and Bair noted..

"Big, ugly giants with names like Countrywide Financial and New Century packaged huge pools of mortgages, sliced them up into securities, and sold them to investors, who now bore the risk if the loans defaulted," they wrote.

The pair said industry figures now have enlisted the aid of affordable-housing advocates to argue that making securitizers retain risk will lead to higher mortgage rates and harm the mortgage chances of low-income families.

But the Fortune column concluded the results were disastrous when mortgage bundlers could walk away from the loans they securitized.

"And far from helping low-income families, they gouged less sophisticated borrowers with mortgages carrying steep rates and fees because those loans commanded bigger up-front payments when securitized and sold to investors."

Mortgage News Daily reported the new Dodd-Frank mortgage rules require creditors to assess a borrower's income, savings, other assets, and debts using verifiable third-party records

In House subcommittee testimony this week, directors from the Consumer Federal Protection Bureau said few community banks and credit unions engaged in the risky lending that led to the mortgage crisis. But they said those institutions may be more likely to retreat from the mortgage market if the Dodd-Frank regulations are too burdensome, Mortgage News Daily reported.

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