Who is protecting borrowers from "predatory lending"? The trial lawyers! Feel better? I didn’t think so. Ted Frank, writing in the Wall Street Journal has the story. Yours truly makes an appearance.
The trial lawyers’ entrepreneurial solution is to go
after the deep pocket. And so we have lawsuits alleging that the
investment banks providing financing to the mortgage banks are "aiding
and abetting" the alleged fraud through securitization.What would be the upshot? If an investment bank is
potentially liable for every conversation and every phone call involved
in the underlying mortgages, the costs of due diligence becomes
prohibitive, far outstripping the fees it can bring in for packaging
the loans…The securitization
simply will not take place….To make matters worse, the House Financial Services Committee held
hearings last week on writing this judicial mistake — and more — into
federal statutory law. Committee Chair Barney Frank (D., Mass.), wants
to hold not only the packagers of mortgages liable but also the purchasers in
the secondary market. "Anybody, including the original borrower, can
make a claim, and the liability would go up the chain," Mr. Frank told
the press….It is not speculation to say that the results will be disastrous if
such a bill becomes law….the 2002 Georgia Fair Lending Act created unlimited liability
to purchasers of mortgages for any legal violations by the loan
originator…all three of the major credit ratings agencies (S&P, Moody’s, and
Fitch) announced they could not rate any securitization containing any
loans subject to Georgia law for fear that the entire security would be
tainted by unquantifiable liability. Liquidity for the state’s mortgage
market disappeared and the Georgia legislature quickly repealed the
worst parts of the law to restore access to credit.
As one both involved in securitizations and generally sympathetic to the pro-business side of the GOP, I can only applaud this development. I thought Frank, Menendez & Co. were going to take much longer to start looking for some rope with which to hang themselves, and yet here they are with a ready-made length already in hand! Bravisimo! :^)
I imagine he feels it would lead to chattel slavery, Anderson. What does that have to do with mortgage lending, exactly?
What does that have to do with mortgage lending, exactly?
Laws against chattel slavery “protect borrowers from themselves.” I am curious whether any superseding values trump the dogma that such protection is a bad thing.
I was doing HEQ securitizations when the Georgia law came down. It was downright comical to see how quickly the state back pedaled after they got smacked down by the markets. If Frank and his ilk actually get something in place, naturally it will have the opposite effect of its intention for those borrowers currently and who will be in a pickle within the next year or so.
Anderson, I’m pretty sure that actual historical slavery didn’t generally involve voluntary transactions. I don’t think too many Africans were asked their opinion, let alone got a $500,000 house out of the deal. Perhaps you’re thinking of indentured servitude.
In any case, it’s not clear what this has to do with holding respnsible people who had nothing whatsoever to do with the mortgage transaction.
It’s bravissimi – plural. And why worry? Even if the Frank legislation becomes law, it would last as long as the Georgia statute. Something like a New York minute. Oh, and Patinator, good point on the ebonics. Let’s not miss an opportunity to display our racism, eh?
Mr. Frank told the press. “People say it may discourage certain kinds of lending. But that’s precisely what we want to do. We will pass a bill that won’t allow companies to loan people more money than they can pay back or loans for more than the value of the house.”
This sounds like, he is using the cover of consumer protection, to protect against failure of financial institutions due to risk shifting of profitable over risky loans. Barney Frank has been credited with being one of the few members of congress who understands the implications of economic policies.
A few things Ted Frank won’t tell you:
1. There’s no actual bill, just hearings.
2. Barney Frank and his Republican collaborator, Spencer Bachus of Alabama, are talking about something like the New Jersey anti-predatory lending law.
3. The NJ law does have the onerous liability requirements Ted Frank talks about, but only for very high-cost loans at interest rates more than 8 percentage points above the T-bill rate or charging 4.5 points or more of fees.
Even if you read this as NJ trying to ban high-cost loans from the secondary market, it seems like a pretty good idea to me. First, someone who’s making a loan like that is probably a crook. Call me a credit snob, but I think it’s very clear that many people are financially illiterate and the case for paternalism is awfully strong. Even if you’re only interested in efficiency arguments, I think a super high-cost loan is very likely to default, and that foreclosed homes sitting empty blight neighborhoods and impose costs on others. Discouraging this sort of thing by requiring lenders to take ownership of their loans is a pretty mild reaction.
I think a super high-cost loan is very likely to default,
Out of curiosity, how likely is “very likely” in that statement? The default rate on subprime loans (that is a crisis) is something in the nature of 10%.
It doesn’t take very many defaults at all to push up the costs that a mortgage lender must charge on similar loan in order to make a profit. (Particularly in a market where home prices are declining.)
First, someone who’s making a loan like that is probably a crook.
Yes, the dastardly plan by mortgage companies to lose millions of dollars when the mortgages went sour. I admit that I have a natural bias in favor of hubris and stupidity as an explanation, but surely you’ve noticed that the “crooks” who engaged in the worst sort of this lending have suffered tremendous losses? The mortgage companies don’t make money on any individual default, so it’s hard for me to accept an explanation that relies on them actually wanting people to default. Stupidity and ignoring risk in search of outsized returns, absolutely. Though that applies to people who, e.g., bought real estate bonds or bought houses expecting the housing bubble to continue so that they could flip them at a massive profit.
I know people who got subprime loans because they were students or fresh out of college and had poor credit and income, but expected that rising home prices meant that they could flip for a tidy profit before the balloon payments killed them. They took loans when they knew that they had to sell the house before the balloon payments hit or else default. I don’t have a ton of sympathy for them, and I don’t think that they’re the only ones. But of course their defaults will punish people who had more simple motivations– just as the proposed legislation will.
I had only 1100 words to work with, so, no, I didn’t include every jot and tittle of trivia I had about the situation. But the points Ragout objects to my leaving out don’t change my analysis (which is why I left them out).
1) There is no bill yet; but Frank has announced that it’s a priority, and I find it disturbing that no one is speaking out against it.
2) Because there is no bill, we don’t know that Frank is willing to settle for something similar to New Jersey; his public language (and the language of people who testified at the hearing) is for something much stricter. We also don’t know whether Bachus is willing to go beyond his stated support for a New Jersey-type bill to support something stricter so that he isn’t seen as opposing the eventual bill. Voters should be aware of the dynamic.
3) New Jersey’s law isn’t anywhere near as straightforward as Ragout says it is: it also imposes liability for “flipping”, which is adjudged by a subjective inquiry impossible to evaluate on the face of the loan. Moreover: “Without limiting the foregoing, it is hereby declared that subsection b. of this section shall create no presumption that any home loan that is not a covered home loan or a high-cost home loan, and any refinancing outside the durational limits set forth above, is not unconscionable, and it is hereby further declared that subsection b. of this section shall create no presumption that any home loan that is not a covered home loan or a high-cost home loan, and any refinancing
outside the durational limits set forth above, shall not constitute an unlawful practice under P.L.1960, c.39 (C.56:8-1 et seq.), based on factors including those set forth in subsection b. of this section alone or in conjunction with any other circumstances.” So the illegality is determined in hindsight.
4) John Thacker ably takes out Ragout’s credit-snob defense. As I note in the WSJ, there are certainly crooks, but they’re on both sides of the table. The law ably handles crooks now. I discuss in more detail at Point of Law.
I don’t think the people talking about fraud here are reading what Ted wrote. He wasn’t criticizing any proposal to impose liability on brokers. He’s talking about proposals to impose liability on the secondary market.
Primary responsibility falls on the borrowers, but of course loan originators may sometimes be guilty of fraud as well. But that doesn’t mean that investors in mortgage-backed securities have done something wrong.
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