Protection Racket

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market disappeared and the Georgia legislature quickly repealed the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.