« Dani Rodrik is blogging | Main | The music of Edward Cumberbatch »
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 Liquidity for the state's mortgage market disappeared and the Georgia legislature quickly repealed the worst parts of the law to restore access to credit.
Posted by Alex Tabarrok on April 25, 2007 at 08:16 AM in Economics, Law | Permalink
Comments
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! :^)
Posted by: Bernard Guerrero at Apr 25, 2007 10:30:40 AM
I wonder how Ted Frank feels about laws forbidding debtors to pledge themselves as collateral.
Posted by: Anderson at Apr 25, 2007 10:36:14 AM
I imagine he feels it would lead to chattel slavery, Anderson. What does that have to do with mortgage lending, exactly?
Posted by: Bernard Guerrero at Apr 25, 2007 10:41:58 AM
There are two larger issues here. The Federal government encouraged home ownership through the tax deduction for mortage interest and through encouraging lenders to lend to less qualified individuals. Many of these individuals probably whould have been better off renting. Promotion of home ownership needs to be reexamined. Better disclousure of risk is reasonable to require. A large print statement that .. your monthly payment will be xxx in three years if the LBOR goes to YYY and QQQ if LBOR is ZZZ would have given some of the unwary consumers pause. There are rules on inappropriate investment advice. Perhaps there should be some rules inappropriate mortgage advice considering that for many low income and not so well educated consumers a home is probably there greatest and perhaps only investment.
Posted by: Sonia at Apr 25, 2007 12:33:55 PM
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.
Posted by: Anderson at Apr 25, 2007 12:42:13 PM
Sonia,
I have never understood why 2nd/vacation homes get the same decutions as primary residences. That is about as close to a tax break for the rich as you can get.
The "monthly payment" section is already in the loan documentation. Brokers downplay it and borrowers look past it. Maybe it should be on page 1 in bold and in ebonics.
Additionally, I have always thought it would be a good idea, for credit card statements, to show how long and how much additional interest paid would take place if only the minimum payment was paid.
Posted by: Patinator at Apr 25, 2007 12:56:45 PM
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.
Posted by: Patinator at Apr 25, 2007 1:02:53 PM
I am curious whether any superseding values trump the dogma that such protection is a bad thing.
You're curious? Uh-huh. Methinks you are trying to engage in the fallacy of the excluded middle by way of innuendo. We (as a society) ban agreements to become slaves because we (as a society) think chattel slavery is bad enough on its own merits as to trump other legitimate rights (such as the right to contract freely to become a slave). It does not follow that a marginal increase in foreclosures due to either the stupidity or greed of a small subset of borrowers is bad enough to also trump the right to contract freely.
Posted by: Bernard Guerrero at Apr 25, 2007 1:20:11 PM
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.
Posted by: David Nieporent at Apr 25, 2007 5:21:21 PM
David Nieporent asks "what holding persons who nothing to do with the mortgage transaction responsible for the insuing problems". One might say nothing unless the packagers of the mortgages promoted unscrupulous sales of inappropriate mortgages with the idea of collecting the pre-payment penalty. Unscrupulous of course is in the eyes of the beholder. I am still getting calls for absurdly low mortgage refinances. Are people still biting? Should warnings be clearer. Patinator's point above concerning "Ebonics" is uncalled for. A reading of the sad stories shows many relatively well educated euro Americans "bought" or were sold ill advised mortgages. Should they have been more wary, of course. Better proto type plain language forms can probably be designed to help consumers be better informed and allow flexibility in offerings.
Posted by: Sonia at Apr 25, 2007 6:08:08 PM
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?
Posted by: gab at Apr 25, 2007 6:26:03 PM
Actual historical slavery was quite varied. It was a common punishment for debtors.
Posted by: David Nieporent at Apr 25, 2007 8:48:29 PM
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.
Posted by: joan at Apr 25, 2007 9:25:45 PM
The 8:48 comment was by me and was meant to be addressed to David Nieporent.
Posted by: Douglas Knight at Apr 25, 2007 9:49:48 PM
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.
Posted by: Ragout at Apr 26, 2007 12:27:30 AM
I have never understood why 2nd/vacation homes get the same decutions as primary residences. That is about as close to a tax break for the rich as you can get.
Well, there is a cap on the amount, up to $1 million total between both for a married couple. Also, you can only treat up to two homes, not more than two. So it could be even closer to a tax break for the rich.
Actually, judging by the over $1 million value of homes of the rich (such as John Edwards' home), it's mostly a tax on that same subset of the upper-middle class and lower-upper class that gets hit by the AMT. And I know that *so* many of those people claim that they aren't *really* "rich" after all, it's those top 2% or top 1% people, and it's unfair that the top 2% and 1% don't actually pay AMT as much as the rest of the top 20%.
In fact, it's precisely that the really very rich don't get hit that much by the AMT in part because their home interest deduction gets capped.
Posted by: John Thacker at Apr 26, 2007 12:35:19 AM
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.
Posted by: John Thacker at Apr 26, 2007 12:51:40 AM
John,
Your response has little to do with what I said. I never denied that lenders deserve to be compensated for the risk of default.
Nor did I mention subprime loans. The NJ law sharply limits loans at the T-bill rate + 8%, which would be close to 13% now. myfico.com puts the subprime rate for a 30-year fixed mortgage at under 10%. Most subprime mortgages are ARMs, and presumably have still lower rates. So, I'm not talking about subprime loans. I'm talking about loans at such high interest rates that there's no doubt a reasonably informed consumer could get a better deal from an honest lender.
Finally, you're naive to think that there aren't any crooks. There are many ways for a crooked mortgage broker to make money from a loan sure to default. If you make a loan to someone with a lot of equity in their home, default causes little fear. Just make a high-cost home-repair loan for, say, 20% of the house value to a senile elderly person who owns a home free and clear. The loan is sure to be repaid, whether the borrower defaults (and has to sell the home) or not. Even better if the crooked mortgage broker can sell the loan on the secondary market, or is in cahoots with a crooked contractor.
Posted by: Ragout at Apr 26, 2007 2:42:02 AM
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.
Posted by: Ted Frank at Apr 26, 2007 8:28:05 AM
It looks to me like the lending industry wants it both ways: to claim that mortgage brokers are independant contractors/companies, thus denying all liability for know actions by the brokers; and to make it so almost all loans *have* to go through such brokers. And when called to task about it, get all huffy, then threaten to take their ball and go home. It is as comical as the lines in Casablanca:
Rick: How can you close me up? On what grounds?
Renault: I'm shocked, shocked to find that there is gambling going on here!
Croupier: Your winnings, sir.
Renault: Oh, thank you very much. Everybody out at once.
These are the same lenders who are whining for massive bailouts, with the bailout money ostensibly laundered through the hands of the homeowners. I have no sympathy for the financial companies involved.
Posted by: Peter at Apr 26, 2007 8:59:20 AM
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.
Posted by: David Nieporent at Apr 26, 2007 6:46:35 PM
Gab,
Is using the term ebonics racist? It always thought is was a term used for the langauge of the poor and uneducated. If I am wrong about that, my bad.
Posted by: Patinator at Apr 27, 2007 11:43:18 AM
大家好，我是臺灣人，從臺灣一個人搬家來到美國，環境很陌生，感覺很孤單。以前在臺灣幾家知名的徵信社工作過，我是一個優秀的徵信工作者，希望早點找到適合自己的工作。希望通過貴站，認識更多的朋友。
Posted by: 謝文豪 at Apr 2, 2008 2:29:59 AM
花蓮,旅遊租車,花蓮旅遊,花蓮租車,花東旅遊,花蓮租車,花蓮租車,花蓮旅遊,租車,花蓮旅行社,花蓮旅遊景點,花蓮旅遊行程,花蓮旅遊地圖,花蓮一日遊,花蓮租車,花蓮租車旅遊網,花蓮租車,花蓮租車,花蓮租車,花東旅遊景點,租車,花蓮旅遊,花東旅遊行程,花東旅遊地圖,花蓮租車公司,花蓮租車,花蓮旅遊租車,花蓮租車,花蓮旅遊,花蓮賞鯨,花蓮旅遊,花蓮旅遊,租車,花蓮租車,花蓮租車 ,花蓮 租車,花蓮,花蓮旅遊網,花蓮租車網,花蓮,租車,花東 旅遊,花蓮 租車,花蓮,旅遊,租車公司,花蓮,花蓮旅遊,花東旅遊,花蓮地圖,包車,花蓮,旅遊租車,花蓮 租車,租車,花蓮租車資訊網,花蓮旅遊,租車,花東,花東地圖,租車公司,租車網,花蓮租車旅遊,租車,花蓮,賞鯨,花蓮旅遊租車,花東旅遊,租車網,花蓮海洋公園,租車 ,花蓮 租車,花蓮,花蓮旅遊,花蓮租車公司,租車花蓮旅遊,花蓮租車,花蓮租車公司,花蓮一日遊,花蓮包車,花蓮租車網,花蓮旅遊,花蓮租車,花蓮旅行社,花東旅遊,花蓮包車,租車,花蓮旅遊,花蓮租車,花蓮一日遊,租車服務,花蓮租車公司,花蓮包車,花蓮旅遊,花蓮租車,花蓮租車公司,花蓮一日遊,花蓮包車,花蓮租車網,花蓮旅遊,花蓮租車,花蓮旅遊,花蓮租車,花蓮租車公司,花蓮一日遊,花蓮租車,租車網,花蓮租車公司,花蓮旅遊,花蓮旅遊,花蓮租車,花蓮租車公司,花蓮租車公司,花蓮一日遊,租車,租車服務,花蓮旅遊,花蓮租車,花蓮租車公司,花蓮一日遊,花蓮旅遊,花蓮賞鯨,花蓮旅遊,花蓮租車,花蓮租車公司,花蓮一日遊,花蓮包車,花蓮租車網,花蓮旅遊,花蓮租車,花蓮租車公司,花蓮一日遊,租車花蓮,花蓮租車,花蓮旅遊,花蓮租車,花蓮租車公司,花蓮一日遊,租車花蓮,花蓮租車,花蓮旅遊,花蓮租車,花蓮租車公司,花蓮一日遊,花蓮包車,花蓮,花蓮旅遊,花蓮租車,花蓮租車公司,花蓮一日遊,花蓮包車,花蓮租車,花蓮旅遊,花蓮租車,花蓮租車公司,花蓮一日遊,花蓮包車,花蓮租車,花蓮旅遊,花蓮租車,花蓮租車公司,花蓮一日遊,花蓮包車,花蓮租車網,租車公司,花蓮租車,花蓮租車公司,花蓮一日遊,花蓮旅遊,花蓮旅遊租車,花蓮租車網,花蓮租車,花蓮一日遊,租車花蓮,花蓮租車,花蓮旅遊租車,花蓮租車,花蓮租車旅遊,花蓮租車,花蓮旅遊,花蓮旅遊,花蓮包車,花蓮溯溪,花蓮泛舟,花蓮溯溪,花蓮旅遊,花蓮旅遊,花蓮租車,租車公司,花蓮旅遊租車,花蓮租車,租車,花蓮旅遊,花蓮租車,花東旅遊,花蓮賞鯨,花蓮旅遊,花蓮泛舟,花蓮賞鯨,花蓮溯溪,花蓮泛舟,花蓮泛舟,花蓮溯溪,花蓮旅遊,花蓮旅遊,花蓮租車,花東旅遊,花蓮,花東,花蓮旅遊,花東旅遊,花蓮租車,花蓮,花東,花蓮旅遊,花蓮租車,花東旅遊,花蓮旅遊,花蓮租車,租車,花蓮旅遊,花蓮租車,花蓮旅遊租車,花蓮旅遊,花蓮租車,花蓮,花東旅遊萬事通,花蓮旅遊,租車,花蓮旅遊,花蓮租車,花蓮旅遊,花蓮租車,花蓮租車,花蓮租車,花蓮旅遊,花蓮租車,花蓮旅遊,花蓮租車,花蓮旅遊,花蓮租車,花蓮旅遊,花蓮租車,花蓮租車,花蓮包車,花蓮旅遊,花蓮租車,花蓮太魯閣,花蓮包車,花東旅遊,花蓮旅遊行程,花蓮旅遊,花蓮 租車,花蓮租車,花蓮租車旅遊,花蓮旅遊租車,租車,花蓮旅遊推薦,花蓮旅遊包車,花蓮租車,花蓮,花蓮租車,花蓮地圖,花蓮旅遊,花蓮旅遊資訊網,花蓮旅遊景點,賞鯨,花蓮旅遊行程,花蓮旅遊,花蓮旅遊租車,花東旅遊景點,花東旅遊行程,花蓮旅遊,花蓮租車,租車,花東旅遊,花蓮旅遊,花蓮租車,花蓮,旅遊達人,旅遊達人blog,花蓮租車旅遊資訊網,花蓮,租車,花蓮,花東旅遊,地圖,租車,賞鯨泛舟溯溪,租車,[ 芝麻店家 ] 花蓮租車旅遊資訊網,花蓮租車-行易花蓮旅遊租車資訊網 ,旅遊網,旅遊景點,花蓮行程,花蓮,花東,旅遊租車,旅遊,花蓮,租車,花東旅遊,花蓮租車旅遊,行易旅遊民宿資訊網,花蓮,旅遊,花蓮,一日遊,花蓮好玩的地方,花蓮,,一日遊,花東,租車,旅遊,花蓮旅遊,花東旅遊,花蓮租車,花蓮租車,花蓮旅遊-花東旅遊萬事通
Posted by: 花蓮賞鯨 at Jun 4, 2009 10:34:40 AM
aion gold
aion money
cheap aion gold
cheap aion money
buy aion gold
Mabinogi online gold
Mabinogi gold
buy Mabinogi gold
cheap Mabinogi gold
Mabinogi money
2moons dil
2moons gold
buy 2moons dil
2moons dil
cheap 2moons dil
flyff gold
flyff penya
flyff money
buy flyff penya
cheap flyff penya
cheap flyff gold
Dofus kamas
buy Dofus kamas
cheap kamas
Dofus kama
Dofus gold
Dofus money
Knight online gold
Knight Gold
Knight Noah
Knight online Noah
Posted by: aion at Jul 9, 2009 11:25:42 PM
