THE CAUSES of the disastrous 2007-08 mortgage meltdown are too numerous to list, let alone regulate. Still, a major factor was the “originate-to-distribute” business model: Lenders made loans and then resold them to other firms that packaged them as securities, which were in turn sold to investors. This system attracted capital to the home mortgage market — but no one in the daisy chain of securitization had an incentive to sweat the borrower’s creditworthiness. Thus did lenders make thousands and thousands of “no-doc,” Alt-A and other exotic loans to underqualified borrowers, which were then bundled and peddled to investors as securities that sit today as toxic sludge on the books of many an unfortunate institution.

Sensibly, the Dodd-Frank financial regulation reform law tried to correct this. On Tuesday, regulators following the law unveiled a proposed rule that would require securitizers to retain 5 percent of the risk of all the mortgages they package and resell. There would be an exception for 30-year loans requiring 20 percent down, with payments representing a sustainable percentage of borrower income. Those especially safe mortgages could be freely securitized as before. In other words, the system would still allow securitization of both less risky “plain vanilla” loans and riskier exotic ones but give the former an advantage over the latter.

This strikes us as a reasonable balance and a credible way to implement the mandate in Dodd-Frank. Yes, it might constrict credit to less than perfect borrowers, which is why banks and securitizers are pushing back against the rule, with some support within the Obama administration. Because of that push back, the administration is leaving open another possibility: allowing unrestricted securitization of loans with lower down payments, which are generally likelier to default, as long as private mortgage insurance covers the additional risk.

That option would certainly protect investors, but what about borrowers? It’s probably best to draw the line at those who can make down payments of 20 percent, and let low- and moderate-
income borrowers who still can’t qualify in the private market turn to the Federal Housing Administration, which is designed to meet their needs. Expanding access to homeownership is important, but the overriding goal of this rule is and should be ridding the broad private-sector mortgage market of as much risk as possible.

Of course, the proposal is a bit theoretical as long as Fannie Mae and Freddie Mac still securitize the vast majority of home loans — aided by their government lifeline. Indeed, some have complained that the newly proposed rule gives Fannie and Freddie an unfair advantage, since it does not require them to retain any of the risk on the loans they securitize. But Fannie and Freddie already retain all of the risk, in that they guarantee the mortgage-backed securities they sell. Their real competitive advantage is their unlimited federal backing. That has to end, as soon as possible, but it won’t happen overnight.