patrick.net

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