How Not To Fix The Subprime Mortgage Crisis, Part II
The New York Times reports that House Democrats are set to introduce legislation to “fix” the problems that caused the subprime mortgage crisis:
WASHINGTON, Oct. 22 — House Democrats introduced legislation on Monday that would for the first time let homeowners sue Wall Street firms for relief from mortgages that the borrowers never had a realistic chance of repaying.
The measure, which is expected to generate intense opposition from the financial services industry, addresses some of the problems tied to the transformation of the mortgage lending industry from an often local business into a trillion-dollar global market for investors in search of higher returns.
The bill is part of a broader measure intended to restrict what lawmakers and consumer advocates consider deceptive and improper lending practices, many of which were common among the millions of soured subprime mortgages to people with low incomes or poor credit histories.
The legislation, introduced by Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, would require any mortgage lender to verify that the borrower has a “reasonable ability to repay” based on documented income, credit history and debt level.
“The people who package mortgages and sell them into the secondary market were a major cause of the single biggest world financial crisis since the Asian crisis” of 1997-8, Mr. Frank said, “and it’s unthinkable that we would leave that undisturbed.”
Under the House bill, people who can show that they never had a reasonable ability to repay the loans would still have to pay for their homes, but would have new statutory power to demand better deals from the lenders. They could demand that their original mortgage lender offer a better loan. Or they could demand relief from the Wall Street firm that bought the mortgage and resold it to investors.
In other words, the House bill would effectively give borrowers the ability to renegotiate the terms of their mortgage without penalty and without increasing the risk premium that that have to pay to get the loan. Furthermore, it would require lenders to take extraordinary steps to verify each borrowers “ability to repay” — an amorphous concept to begin with and one that is hard to verify outside of relying upon the credit ratings and verifications of employment that every lender relies upon. Finally, the bill seems to extend liability for these actions to secondary holders of mortgage-backed securities; an idea which makes no sense whatsoever given that the secondary holders had no role in the original transaction.
The ultimate impact of legislation like this is easy to see. Credit, whether or mortgages or any other types of loan, will be harder to get for people at the fringes of the economy. Some people may argue that this isn’t a bad thing, that it was loans to people like this that created the subprime mess to begin with. And they have a point.
But there’s where politics becomes involved. Today, the left complains because supposedly predatory lenders took advantage of people with bad credit by offering them the only loans they could qualify. Twenty years ago, they were complaining about redlining and alleging that lenders were discriminating against the poor and minorities by refusing to lend to them because they were bad credit risks. If legislation like this passes and the credit markets dry up again, that’s exactly what we’ll be hearing ten yeasrs from now, if not sooner.