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The 5% holdback will be manageable. Other issues will get worked through. The real problem is the rating agencies. Before FinReg was passed, there were monitors recently appointed at the agencies to watch over every aspect of the underwriters and other areas. There is a whole new layer of oversight. That was bad enough. Now FinReg has mandated that the agencies can be held liable for damages due to their ratings. This is the tort lawyers full employment act. There is no jury I have ever seen that is capable of even understanding how ratings work or how underwriting is done. Claiming to a jury that the agency should have known or should not have issued the high rating will not be hard to claim and almost impossible to defend after the fact.

Here is the result. The agencies have become ultra conservative. If you look at what has been approved so far it is only the best quality deals at reasonable leverage. They have been one asset or several high quality assets, but not anything else. While there will be future deals with more smaller loans and probably lesser quality than what was done thus far, the quality will still be high. The days of wide open conduits is over for at least several years.

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