Loan packaging under scrutiny

U.S. financial regulators will propose changes in the rules for packaging loans into bonds in the aftermath of the sub-prime credit collapse, Treasury Secretary Henry M. Paulson Jr. said.

It will be a number of months before a presidential working group that is considering the issue makes its recommendations, Paulson told Bloomberg Television. The group, which includes the heads of the Treasury, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission, has yet to reach conclusions, he said.

Banks and securities firms have amassed more than $146 billion of losses, mostly on mortgage-related holdings, after a surge in defaults on sub-prime home loans rippled through financial markets.

“You can’t have gone through the process we’ve gone through without knowing there needs to be some changes,” Paulson said.

Most sub-prime mortgages, those aimed at borrowers with poor credit, were packaged into bonds. Those securities were then often repackaged into investments known as collateralized debt obligations.

Consumer advocates say securitization magnified losses because lenders had little incentive to ensure that borrowers could make their payments.

“We’re looking at securitization carefully,” Paulson said. But he added that the aim wasn’t to end the practice.

“Securitization is here to stay,” he said.