Loan To Income Value Is The Best Way To Regulate Mortgage Industry

The San Francisco Federal Reserve argues that reliance on loan to home value in evaluating mortgage risk was a mistake because home prices are part of the equation and the were rising in the bubble.  It  makes the case for using income to loan value as the better metric for regulators to use.  That is better metric, but the major reason for the housing bubble is that mortgage originators were selling the mortgages to investment banks who bundled them into securities for resale.  The mortgage originators had no skin in the game, and the Chairman of the Fed refused to believe that investment banks would sell toxic securities to its customers.  He believed that markets are self regulating, and that the banks would do nothing to harm their reputation with their customers.