New MBS Liability Law: Good or Bad Idea?
2007 Apr 10, 5:08am 24,994 views 248 comments
by HARM follow (0)
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Peter P
2007 Apr 10, 5:14am
But this move is consistent with the contraction phase of a credit/asset bubble.
sfbubblebuyer
2007 Apr 10, 5:32am
If they made the mortgage brokers liable for all the fees and debt from a predatory lending scheme, then I'd be behind it. The fund investors didn't put a teaser rate infront of a FB, the broker did it. If they passed a law making mortage brokers liable for fees for predatory lending, and if non-predatory, they have to return their fees for originating non-performing loans, you'd see a lot of cleaning up in very little time.
What's worse is that Jack Guttentag (Mtg. Prof.) has already said that the MB's are fighting disclosure on YSP (yield spread premiums) tooth and nail!
Un-freaking-real!
They're acting like a bunch of football jocks that got busted providing alcohol to minor girls at their frat house but somehow still refuse to believe this should affect their playing eligibility? I mean c'mon coach!
True... what we did was wrong (but did you see the gazongas on THAT one!) but look at all the "good" we do for the school!
It's like they're waiting to get their "10 laps" so they can go right back to the status quo. These guys just don't get it? There's nothing to go "back" to!
"you'd see a lot of cleaning up in very little time"
That's... r i g h t !
In any other end of financial services if you're fined and can't come up with the $'s the association just assumes you are forfeiting your license and you're banned for life. At the very least you'll become "radio-active" to prospective employers when you're deemed too big a liability and let go. It's just that simple.
What’s worse is that Jack Guttentag (Mtg. Prof.) has already said that the MB’s are fighting disclosure on YSP (yield spread premiums) tooth and nail!
What's a YSP?
Consumers need more education, not more regulations.
Consumers get plenty of education - from places like Quicken Loans, LowerMyBills, ditech, etc.
Yield Spread Premium is paid by the lender to the MB to steer business their way. In essence the broker is getting paid on BOTH ends of the loan! From the consumer (borrower) on the front end and from the lender as a kick back on the back end.
They're pissed as hell that we're even talking about making this mandatory on the GFE (good faith estimate)! Disclosure!?! Why is this even legal? Disclosed or not?
GC,
Thanks. One gal that went "under cover" after 10 years in the industry said that some brokers "disclose" the YSP by simply putting a "1" in that column. So the avg. consumer sees that and says Oh, it's (one) dollar because it's POC (paid outside closing). It's not a dollar, it's a point! And Mr. Borrower will be paying on it for the next 30 years. No big, right?
How sleazy.
Consumers need more education, not more regulations.
Exactly right.....they need more education and they are getting it now free! Unless they start bailing people out.
There was no regulation on the way up, why should we be regulating on the way down? Let the markets run their course and let the chips fall where they may.
People need to take responsibility for their own bad decisions. While blame does go to those who profited from housing, the bottom line is that none of this could have possibly happened without a willing buyer. No one put a gun to their head! Whenever an expensive purchase is made, there are always risks and it should be up to the buyer to do their research. People should not be able to get away with their mistakes by declaring ignorance.
If someone goes to vegas and loses all their money, it is their own fault. Should they be entitled to a bailout because they "didn't realize" they could lose all their money?
What angers me the most is that because these are houses that they stand to lose, they tend to make it seem that they're going to be homeless if they lose the house; they are just going to have to rent again, they have jobs, they can afford to rent! Perhaps the bailout should include funds for all us renters to be able to purchase an overpriced house!
Let the markets correct themselves and let the people learn so that the next generation will learn the importance of saving and the dangers of debt, not undeserved rewards from it.
HARM, I agree with most of what you're saying. The bondholders are holding the bag. The key distinction in the proposed legislation is the point I think you missed:
investors in mortgage bonds should be liable for deceptive loans made by banks
The point is that banks were accountable in the old days of mortgages. But now that the chain is so fragmented, the bondholders only hold the credit risk and not the legal liability risk. That gets concentrated solely among the (sometimes fly-by-night) originators. But if the originator simply cashes in his chips, there's no recourse for those holding the "deceptive loans" except for maybe US taxpayers...
If the loan was truly deceptive, why should the bondholder be allowed to keep all those interest payments it obtained from our newly defaulted (and defrauded) borrowed? They should be the next
I think this makes a lot of sense. It should not apply to (and there's no implication here that it would) to all defaults. Only in the case of fraud.
Peter P
2007 Apr 10, 6:19am
People need to take responsibility for their own bad decisions.
Exactly. This is also why I am against food policing. People should be able to eat all the trans fat they want.
@DinOR,
No kidding. I didn't find one mention of YSP disclosure in that proposal, yet this is one of the biggest reasons why mtg. brokers have been overwhelmingly pitching this crap for 6+ years straight. The more toxic the loan, the greater the YSP. How's that for a perverse incentive structure? The worst loans generate the highest return (all behind-the-borrower's back, of course).
Am I completely off, or are these investors who "provided liquidity without responsibility'’ pretty much standard mutual funds, institutional and retirement investors, all via the likes of Freddie Mac and Fannie, Ginny Mae?
So these dolts in Congress want all of US to pay? Does this make sense?
By the way, the net result of putting liability on the bondholder is going to increase scrutiny of all these craptastic bonds and prevent many of them from ever seeing the light of day. Not only will credit agencies (Moody's, S&P) have to comb through MBS with a fine-toothed comb, but so will attorneys to spot potentially fraud before it moves down the pipe. Net-net, this will choke off more liquidity to both the fly-by-night originators and stupid borrowers...
allah,
Whatever else happens the "originators" need to un-ass those commissions. If the individual broker can't pay (which after Vegas jaunts and "elective" surgery for the Mrs.) I seriously doubt, then he's out. If the firm can't cover the fees on the defaulted loan, then THEY'RE OUT!
This isn't regulation, this isn't education and ain't no bail-out.
This is punishment! Heh-heh-ha!
So let me see if understand the proposal: I borrow money beyond my means. I spend it all -- perhaps in pursuit of the American dream of homeownership but also possibly on a nice car, nice vacations and a lifestyle that I was unable to afford (but by gosh surely deserved). And now, because I can't pay the money back, I get even more money because, well, someone gave me too much money the first time? Sign me up!
No, Sandibe. If you commit fraud you will be prosecuted. Believe it or not, there are bad seeds out there that committed plenty of fraud on unsuspecting people. There are plenty of greedy homeowners too but let's try to make the distinction.
I echo Sandibe's thoughts. So if a bank loans money for someone to start their medical practice and that Dr dispenses drugs to everyone in pain, is the bank liable ?
What we are witnessing is the classic as old as time - pass the blame - game. From a politician's point of view, SOMEONE needs to be punished. Cannot be the FBs - that will alienate the vote banks. Cannot be the Wall Str banks who sliced and dice the debt to make money on commissions, because they sponsor the campaign. So who else ? The actual people who gave the money ... YES ! They made us do it.
I am sure there is some Aesop Fable related to this.
Sandibe,
Exactly. This is the single biggest problem I have with this proposal. Aside from (a) basically giving sleazeball mtg. brokers & banksters a free pass (see DinOR's rants), it (b) more-or-less auto-confers "victim" status on FBs, regardless of what the circumstances really were.
Was Casey Serin a victim? Does he (and his lawyer) really deserve the right to sue the pants off some pension fund because they happen to be the final bagholders in a long-assed chain of deliberate, systemic fraud and risk-passing by the REIC?
Where was the "fiduciary responsiblity" of the f**king banks or the mortgage brokers when they originated the loans? Like DinOR says, if you can't make your MBS bondholders whole again, then why are you allowed to keep your license and just open up shop elsewhere? Why isn't your fraudulent ass in jail --along with Mr. Serin's?
No, Sandibe. If you commit fraud you will be prosecuted.
PAR, however much I wish this were true, it's simply not. The fact that CS is still operating his website, despite admitting to multiple counts of mortgage fraud in plain sight --hell, practically *daring* the authorities to prosecute his boney ass-- is sad proof of this. The feds obviously have no desire to go after small-time actors like him, and even *less* desire to go after the banksters & REIC, who are by and large, financing our elections.
bill gross at pimco has written a great piece on the subprime mortgage market's possible repurcusions has on our lives
http://tinyurl.com/2zfsv6
Interesting mixed signals:
http://money.cnn.com/2007/04/10/real_estate/alta_alive.moneymag/index.htm?postversion=2007041016
On the one hand, there is some pullback from MBS investors. On the other hand, Alt-A category loans, including no-doc, option ARM basically NINJA loans, are still widely available, at least anecdotally. This seems ridiculous in today's environment. There will be SO MUCH PAIN down the road. We are totally screwed as a nation and as an economy.
HARM,
This is exactly why I think the brunt of the blame (and the pain) belongs squarely with the MB's. They weren't in it for the borrowers (as is there entire claim for even existing!). They sure as HELL weren't in it for the lenders.
They were in it for THEMSELVES! This much, should be apparent! You're absolutely right, the compensation schedule was stood up on it's ear as they conned prime borrowers into Alt-A paper and Alt-A borrowers into Subprime paper! AND got paid BETTER the harder the f@cked these people!
Of all the parties in this equation (and they're all guilty) ONLY the MB's got to screw on BOTH ends! Now these guys got the notion they can just fold up their tent, move down the road and "tweak" their model ever so slightly and walk away from the mess THEY created? Huh-uh. HELL no.
@Person,
Like DinOR pointed out, so-called AAA-rated "prime" paper is really turning out to be not-so-prime after all. The housing bubble not only grossly distorted risk premiums & lending patterns, it also distorted perceived loan quality. I wouldn't assume large public/private pension funds are A-ok, just because they only bought "prime" GSE-issued paper.
AAA (2005) = Alt-A (2008)
Alt-A (2005) = BBB (2008)
BBB (2005) = ZZZ (2008) etc...
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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