Sir, Your editorial on Barney Frank's home-lending reform bill is certainly right in apportioning blame for the present U.S. subprime mortgage crisis to a lack of governmental regulatory oversight (Time to avoid a subprime future, October 29).

However, it overlooks the danger of a congressional regulatory overreaction, which could seriously impede the proper functioning of the U.S. mortgage market.

Might not a simpler approach to mortgage reform be to harness market forces by requiring that all mortgage originators be adequately capitalised and be required to hold until maturity a significant portion of any mortgage that they originate? In recent years, almost 50 percent of U.S. home mortgages were originated by poorly capitalised originators, which typically sold in short order their full stake in the mortgages they originated for securitisation purposes.

By requiring mortgage originators to hold at least part of the mortgages they originate, one would be establishing powerful incentives for all originators to exercise better due diligence in making loans and to refrain from making loans to those borrowers who are most unlikely to meet the loan's terms.

Desmond Lachman is a resident fellow at AEI.