Yesterday, House Democrats introduced legislation to combat abuses in the mortgage lending market, and to provide basic protections to mortgage consumers and investors. Click here for Press Release. The bill, H.R. 3915, the “The Mortgage Reform and Anti-Predatory Lending Act of 2007” reportedly aims to reform mortgage practices in three areas. First, the bill would establish a federal duty of care, prohibit steering, and call for licensing and registration of mortgage originators, including brokers and bank loan officers. Second, the legislation would set a minimum standard for all mortgages which states that borrowers must have a reasonable ability to repay. Third, the legislation attaches limited liability to secondary market securitizers who package and sell interest in home mortgage loans outside of these standards.
Section 204 of the Bill, “Securitizer Liability” is a lot less than advertised in press releases and news reports. Click here for HR 3915 Summary. The idea is to open another pocket to the injured borrower which could be important as mortgage brokers are increasingly insolvent and unavailable to provide a remedy. However, the securitzer can avoid liability by offering the borrower a loan that meets minimum standards or by maintaining various policies and procedures designed to avoid purchasing unqualified mortgages. It is not enough to deter conduct in a billion dollar business where carefully looking the other way means large profits.
More important, there is no protection for unsuspecting customers who purchase bonds or CDOs made up of loans that violate the proposed Bill’s lending rules. The subprime lending debacle was fueled with innocent investor money, as purchasers of mortgage-backed securities bought billions in bonds and CDO tranches they thought were designed to produce an uninspired but steady and safe return. HR 3915 does nothing to hold the securitizers liable to customers for the mortgage backed securities they sell. As long as that lucrative market is unchanged the lifeboat for mortgage borrowers is going to leak big time.
Links/Sources:
HR 3915 Summary.
http://www.house.gov/apps/list/press/financialsvcs_dem/section_by_section_10_22_07_(2).pdf
House Finance Committee Press Release: http://www.house.gov/apps/list/press/financialsvcs_dem/press102207.shtml
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