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New MBS Liability Law: Good or Bad Idea?


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2007 Apr 10, 5:08am   23,086 views  248 comments

by HARM   ➕follow (0)   💰tip   ignore  

Mortgage Bondholders May Bear Subprime Loan Risk

Some excerpts:

The top Democrat and Republican on the House Financial Services Committee said investors in mortgage bonds should be liable for deceptive loans made by banks.

Democratic Chairman Barney Frank of Massachusetts and Spencer Bachus of Alabama, the committee's highest-ranking Republican, said such legislation would discourage lenders from extending loans to people with poor credit histories by making it more difficult and expensive for the banks to sell the mortgages.

``More money was being lent than should have been lent,'' Frank said in an interview from Washington. Frank, who last month predicted that the House would approve such a bill this year, said growth in the market for mortgage bonds ``provided liquidity without responsibility.''

...Bachus said he favors legislation similar to a law enacted in New Jersey in 2003 enabling homeowners whose loans are the result of predatory lending to gain compensation from lenders and investors who purchased the mortgages. The indemnity includes attorneys' fees, the borrower's total loan payments and the cost of terminating the borrower's remaining liability.

...By dispersing risk, the bonds fueled reckless and unscrupulous lending and compromised underwriting standards, he said. ``There should be a decrease'' in the money available for subprime mortgages, he said.

Reckless investors shouldn't receive any sympathy, Frank said.

Hmmm...

Ok, I'm as big a critic of the explosion of MBS/CDOs (as a prime cause/trigger) in the housing bubble as anyone on this blog. I basically agree with Frank's latter statements criticizing MBS/CDOs as encouraging reckless lending by dispersing too much risk away from loan originators (the banks & the retail mortgage brokers). But I'm not so sure that exposing MBS/CDO bondholders to massive lawsuit risk --on top of getting hosed by the BBB & Alt-A implosion-- is really the way to go here.

Come to think of it, aren't MBS/CDO bondholders pretty much holding the bag here already? They're pretty much the bottom guys in the mortgage food chain --after the originators and Wall Street middlemen have taken their cut and washed their hands of any risk or responsibility. After all is said and done, the only real legal/financial recourse the final bondholder has is to demand repurchase (by the originator) on MBSs that contain non-performing loans. If the originator is some fly-by-night New Century/Fremont/Ameriquest/MLS type outfit, and that outfit goes belly-up, then what options does the bondholder really have left? They basically have to eat the loss, right? Do they really deserve the threat of class-action lawsuits by FBs on top of already being stupid and broke?

If Congress wants to start regulating/curtailing fraud and reckless lending in the MBS bond markets, why not place a little legal liability on those who receive the maximum amount of profit for the very least amount of risk --the originating banks and mortgage brokers?

I'm all in favor of regulation that properly aligns risk with reward, but frankly I don't see how this proposal accomplishes that.
Your thoughts?

HARM

#housing

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190   Malcolm   2007 Apr 11, 3:30am  

25K is chump change to a real investor.

191   Malcolm   2007 Apr 11, 3:32am  

It's the same people criticizing the system for excess who want to take thier measly $500 and turn it into $10,000 and then whine because no such mecahnism exists, so someone with $1,000,000 making 6% seems like excess to them. Gotta punish 'em.

192   DaBoss   2007 Apr 11, 3:34am  

Vicente Said..
"I will not buy a house with a bunch of overpriced “extras” that are there not to offer me good value but just to jack up their profits."

Try telling that to bunch of women! As Jack once said..."How do I get into a mind of a women... I take a man, remove reason and accountability".
The little lady realtors will label you as an "uncommited buyer with issues".

Sadly the market over the recent years have been driven more by 'Emotions' than any kind of common sense. Marketing of homes has been peppered with feminine charm. Former 800sq crack house is now a "charming Bongalo" and all the rest of the nonsense.

193   Malcolm   2007 Apr 11, 3:41am  

Hello
Yes, but believe it or not I actually care about others. I'm cleaning up either way. It is frustrating to me to hear people limiting their own futures because they haven't seen the other side of things as yet.

194   Malcolm   2007 Apr 11, 3:43am  

For my purposes I would love nothing more than a huge crash, no available credit or horrific interest rates, and a bunch of very nice properties with pools and granite to pick from.

195   DaBoss   2007 Apr 11, 3:45am  

"I believe in Intelligent Design"

Wimps!

196   Malcolm   2007 Apr 11, 3:46am  

I wish I wanted to live in NM, you could buy the whole middle of the state. In parts I calculated 70% of the lots are for sale. With a few million dollars you could literally buy the middle of the state at 900/acre and that's without negotiating.

197   Malcolm   2007 Apr 11, 3:47am  

LOL space

198   Malcolm   2007 Apr 11, 3:49am  

Peter did you ever hear the joke about people like us who don't believe in organized religion?

It goes then we must believe in unorganized religion. We sometimes meet on Sunday, if no one shows we move it to Wednesday night sometime, we just start when people show up, and we pick the book for the following week.

199   Peter P   2007 Apr 11, 3:50am  

We do think alike.

I guessed so too. How was the key lime pie?

200   Malcolm   2007 Apr 11, 3:50am  

HelloK, I have a Porsche but I view my Prius as more of a status symbol. It is pretty funny how much truth is in your post.

201   Peter P   2007 Apr 11, 3:51am  

LOL!

202   Peter P   2007 Apr 11, 3:51am  

Perhaps Porsche should make a hybrid.

203   Malcolm   2007 Apr 11, 3:52am  

Really good. I had one of those dilemas again so I bought both the key lime and the chocolate cake. I had the lime last night, we are sharing the chocolate this morning. I'm flying back to Cali this afternoon.

204   DaBoss   2007 Apr 11, 3:52am  

Either you do or you dont!

Intelligent Design is nothing more than
a move to teach God in public schools.

Religion took a back seat back in 1959
when the Godless Communist actually
put a man in space. Where was GOD in
all this people asked? After all we all
preyed to HIM! Are we not the chosen
people! LOL!!!!

205   Peter P   2007 Apr 11, 3:54am  

I think even loan-sharking should be legalized. Of course, illegal collection practices should not be tolerated. It is a civilized society after all. But if a consumer is willing to borrow at 2000% annualized interest rate, no one should stop him.

206   StuckInBA   2007 Apr 11, 3:55am  

Just read this on Yahoo news. Very short article, so reposting the complete text.

http://news.yahoo.com/s/nm/20070411/bs_nm/usa_subprime_congress_dc_1


Lawmakers propose aid for subprime borrowers

WASHINGTON (Reuters) - The federal government should offer troubled borrowers hundreds of millions of dollars to bail them out of subprime mortgage loans, several leading Democratic lawmakers said on Wednesday.

"The federal government can send in an infusion of (money) to prevent foreclosure," said Charles Schumer (news, bio, voting record), a New York Democrat.

The cash infusion is needed right away and should go to both help fund community groups aiding troubled borrowers and to directly fund bailouts, Schumer said.

Schumer spoke as chairman of the Joint Economic Committee, a joint committee of Congress, and appeared with Democratic senators Robert Menendez (news, bio, voting record) of New Jersey and Sherrod Brown (news, bio, voting record) of Ohio.

He said he planned to introduce legislation soon.

207   Malcolm   2007 Apr 11, 3:59am  

You know what sucks StuckBA? It wouldn't be so bad but 2 years ago when I would debate the housing bubble with my friends I even outlined the blame game and the bailout hero legislators.

208   StuckInBA   2007 Apr 11, 3:59am  

This is the first time my blood boiled after reading a bailout news. Till now I was cynical and dismissing these as political stunts. But the wording of the article is so pathetic, so irresponsible and so shameless. Not a single word of counter arguments.

209   HARM   2007 Apr 11, 4:01am  

This about sums it up for me:

Skibum said:

...as I see it, Frank’s solution may indeed deter bondholders from freely funding subprimes (via deterrence), but it seems to be a convoluted solution to a convoluted problem...

Wouldn’t the simple, common sense solution be to change the system that allows dilution of risk? Why was this a good thing in the first place (other than making money off of subprimes)? What’s lost here is that the basic investment principle that the potential for higher returns should come at the cost of higher risk on the downside. The entire system of MBS counteracts this principle. So ironically similar to the FBs motivations, average investors or even average fund managers over the past few years jumped at the chance of getting a high return at minimal risk.

Should these investors be liable for compensating the end user (FB)? Probably not, I’d say. This thing smells to me like a convenient excuse for someone in Congress wed to trial lawyer lobbying money to find another tort for trial lawyers to bank money from.

Malcolm said:

If you buy into a ponzi ...then don’t go looking for someone to blame. Certainly not the guy all the way at the end of the chain who ended up with the junk note.

What cracks me up is that a lot of these bad loans revert back to the originator anyway so we’re still going to hold the bond market accountable?

Aha! I just figured it out, it’s not the lawyers for the FBs. They’re too small, it is the lawyers for New Century and those big players that must be behind this. God, all you have to do is follow the money trail. They are the ones losing big by having to take back the loans, and they now need someone to share the cost never mind the fact that the purchase contracts are crystal clear.

While the anti-bubble housing bear in me likes the fact that Frank's law would immediately crash the MBS easy-money mortgage lending market (probably overnight), I think it's basically punishing the least guilty actors (retail bondholders), while also giving a free pass to the people most responsible for the whole mess --namely, the Wall Street firms & banksters who setup the whole MBS risk-transferrence scheme to begin with. And it would create a whole new market for class-action lawsuits to mainly benefit trial lawyers and FBs, many of whom (though not all) were guilty/complicit themselves.

210   Malcolm   2007 Apr 11, 4:02am  

Money tree and those payday guys actually work out to be in the hundreds of percent. Since a lot of the JBRs use them and literally now depend on them they don't seem to want to punish them. Am I the only one who finds this hysterically funny?
Everytime someone mentions protecting those borrowers Jesse Jackson shows up with his 'rent a mob'.

211   Peter P   2007 Apr 11, 4:04am  

As in the Sheriff / Courts refused to cooperate.

Send in the national guards! :)

Well, it is a different story if a person lacks the mental capacity, unless that person should reasonably have such capacity.

212   skibum   2007 Apr 11, 4:06am  

Everytime someone mentions protecting those borrowers Jesse Jackson shows up with his ‘rent a mob’.

LOL. That guy has done nothing useful for society. At least he's marginally more respectable than Al Sharpton.

213   Malcolm   2007 Apr 11, 4:07am  

Harm, the only thing I could even consider from the other point of view is maybe taking out the cherry picking clauses, but those are only for basically blatant bad loans that default in the first few months. The bond holders hold the bag of dilluted risk during the normal rate of defaults. It is so clearly that some powerful entities are getting jammed right now. I have to add that these subprime originators were rolling in the dough when times were different. You want to talk about excess we're talking Lear jets, indoor jogging tracks, the whole shabang. The stockholders did very very well also.

214   Malcolm   2007 Apr 11, 4:08am  

He happened to be in a couple of photos and videos with ML King and has shrewdley captitalized on it ever since. I almost have to respect him for that. He is the William Hung of Civil Rights.

215   Malcolm   2007 Apr 11, 4:10am  

Honestly though these guys were just operating off of lines of credit. Going back to the car analogy, if I get a loan and buy a car, then use it in a bank robbery, how is the bank liable?

If I take a line of credit and lend it to some desperate guy at Russian mafia interest rates, how is the bank liable?

216   skibum   2007 Apr 11, 4:15am  

He is the William Hung of Civil Rights.

Malcolm,

Man, you're on a roll.

217   Malcolm   2007 Apr 11, 4:17am  

One or two more befor I have to pack up. I think we should take China to international court for wrecklessly funding Congress's spending spree.

218   Malcolm   2007 Apr 11, 4:19am  

After a while you've gotta just laugh at this stuff. All these little pinhead bureaucrats running around trying to fix the mess they created, and then blaming the marketplace. I just can't take it seriously anymore.

219   skibum   2007 Apr 11, 4:21am  

FYI,

Just released are the minutes from the last Fed Reserve meeting in March:

http://www.federalreserve.gov/fomc/minutes/20070321.htm

If you haven't already noticed, the stock market doesn't like what it sees. My take on the minutes is that surprisingly to many, the Fed is still significantly concerned about inflation risk, and they are at least implying they are willing to raise rates further if inflation measures don't behave. On the other hand, I've always suspected that they would like to ideally continue to threaten rate raises without actually doing it, at least not until after the 2008 elections.

How does this affect the bubble? They acknowledged many times both the slowdown in housing and the subprime mess, but basically blew them off as not too severe and therefore manageable. In the best possible world, they are saying, "let's let the housing chips fall where they may." Worst case, they are clueless.

My overall read? They are starting to get worried about stagflation as a real possibility.

220   HARM   2007 Apr 11, 4:21am  

Malcolm,

We'll obviously have to agree to disagree re: Prop. 13. My biggest beef with it (in its current form) is two-fold:

Claim1: It purports to "protect" low-income seniors from being "thrown out into the street".

Reality1: It "protects" ALL long-time property owners --including some very wealthy holding/shell companies that were specifically created to exploit Prop. 13. All that matters is when the property was purchased --there is no means testing.

Claim2: It purports to "protect" all homeowners from large tax hikes due to excessive inflation and speculative bubbles.

Reality2: It provides the lion's share of inflation/bubble "protection" to people who bought a long-time ago (maximum protection goes to those who bought in or before 1978), and does virtually nothing for younger, recent buyers. Essentially, it just transfers to the property tax burden --via inflation-- from old to young, regardless of an individual's (or holding company's) ability to pay.

I don't like tax systems that claim to make things "more fair" then do precisely the opposite. I don't like tax systems that appeal to people's emotions ("don't throw grandma into the street, you callous brute!"), but are mainly structured to help out those who least need helping (rich Boomers and holding companies).

What would turn me into a Prop. 13 supporter? A:

(1) Extend the 1978 tax basis to EVERYONE. If I buy a house tomorrow, then I get the same 1978+2%/yr tax basis as Mr. Rich McBoomer and ACME Land Holding Co. Inc.

Or...

(2) Severely means-test/restrict Prop. 13 to apply ONLY to low-income seniors. Specifically EXCLUDE corporations, rich people, and do not allow seniors to automatically transfer their tax basis to heirs (unless those heirs also happen to be low-income seniors).

There is no free lunch. Someone has to pay --always. It's just a matter of who and how much.

221   Malcolm   2007 Apr 11, 4:21am  

Kitty, nice try. I have a little bit of trouble with tying some bondholder at the end of complex chain which is legally set up in an evolved market with someone who is a direct party to a crime. But good job on the creativity.

222   Malcolm   2007 Apr 11, 4:23am  

HARM, even if I agree totally with the realities of the situation what's wrong with them. What is fundamentally wrong with a system that makes it easier not harder on people over the long term. Now we can say home ownership is not fair because it shelters people from rent increases. I say that is a good thing.

223   Malcolm   2007 Apr 11, 4:25am  

Checking out, look forward to logging on later.

224   sfbubblebuyer   2007 Apr 11, 4:33am  

In the case of fraud against a FB'er who really did get tricked, the amount he would be owed is :

His downpayment
His court fees
His loan fees
His principal payments
The ability to either
1) Walk with no foreclosure/debt forgiveness/etc
2) Mandatory no-charge refi to a fixed rate mortgage at the lower of the current rate or the average rate at the time of the original loan.

Those should come out of the MBs pocket, then the originator's pocket, before they get passed further upstream. That level of liability being passed all the way to the MBS assuming that the institutions on the way fail is reasonable. And it would be relatively easy to price into the model.

However, you shouldn't be able to sue the people who bought into the MBS. The damages above should be guarenteed in cases of fraud, but tryign to get 'emotional distress' and 'punative damages' and all that crap. MBs and originators could be sued for that till the cows come home, but passing that kind of legislative crap onto grandma's retirement account is not cool.

225   StuckInBA   2007 Apr 11, 4:34am  

skibum :

Yeah ... I am beginning to respect this Bernanke guy. He playing it smartly. He knows vast majority is against rate increase, but he is indeed aware of the inflation risk. So he keeps posturing. Once there is enough data supporting inflation on the rise, the majority opinion will shift towards hike and then he will do it. (Not that I agree with what he is doing, but I understand him better. He is not some dovish Helicopter Ben the blogs often portray him.)

I have been positioning for a stagflation for some time now. I would love to proved wrong. But if it happens, I PRAY TO GOD, the Maestro Greenspan gets blamed and ridiculed for what he did to the economy. It will partially offset the pain of stagflation.

226   StuckInBA   2007 Apr 11, 4:35am  

Damn italics again. Forgot to proofread my comments.

227   Jimbo   2007 Apr 11, 4:39am  

Your point sounds good, let’s look at it in detail. First, get one thing straight, renters are the end payers of property taxes not the landlords. Property tax is is just an operating expense to us, and we pass the costs onto you. Next, the argument higher taxes are needed to fund schools is propaganda. The lottery was supposed to fix all of that it’s failure is proof of what happens when you tax for the sake of taxing. Next, every few years we have bond measures which promise to be a cureall for schools, and when they pass it almost becomes a free for all, the following election there are even more bond measures.

California is something like 48th in spending per pupil when adjusted for cost of living. And yes, California is still growing, so we need to keep passing bonds to pay for infrastructure growth.

And no, you can't just "pass on" operating costs to tenants, if you believe that, you are not really a landlord. You get to charge what the market will bear, not what you need to cover your costs. And in rent-controlled areas, sometimes not even that.

228   sfbubblebuyer   2007 Apr 11, 4:40am  

As a note, it should be obvious that I meant that he got the settlement if he walked, or he gets nothing if he keeps the house and takes the free refi into a sane loan.

229   Peter P   2007 Apr 11, 4:47am  

Claim1: It purports to “protect” low-income seniors from being “thrown out into the street”.

They can sell and live very well in luxurious assisted living condos. The one across from Stanford Shopping Center looks amazing.

Claim2: It purports to “protect” all homeowners from large tax hikes due to excessive inflation and speculative bubbles.

More incentives for residents to favor market processes and oppose NIMBYism. :)

Ideally there should not be a property tax. If there must be be let's make it a consumption tax and charge according to utility (e.g. rental) value.

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