Bondholders may be held liable for subprime loans

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

An article today on Bloomberg.com (hat tip: Greg at Bloodhound Blog) reports on the ~~progress~~ that Republicans and Democrats are making towards legislation that would prevent subprime borrowers from getting in to loans that they aren’t able to repay. Frank, who is also sponsor of the Expanding Homeownership Act of 2007 legislation says:

"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.”

Frank and his Republican counterpart want to see legislation enacted that resembles New Jersey’s tough laws on passing liability for bad mortgages up the chain. They are looking to pass legislation that would hold mortgage "assignees" responsible for the loans that are contained in the securities that they purchase.

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.

…The New Jersey law erected safeguards against predatory lending, including a requirement that lenders certify that borrowers can repay the loan. The borrower must receive financial counseling when financing mortgage points and fees, which may not exceed 2 percent of the total loan amount.

The “assignee liability” spelled out by “New Jersey is what I would go for, it works,” Bachus said. Frank declined to describe what he would include in any bill. …

“There should be a decrease” in the money available for subprime mortgages, he [Frank] said.

While I have a lot to say on this issue, and already started to with my Barney Frank=Bad Idea post, I don’t have time to go in to my argument. Here are my summarized thoughts:

Mr. Frank wants to open up FHA lending to allow more subprime borrowers to qualify under government sponsored programs.
Mr. Frank wants to ~~kill subprime homeownership~~ drastically reduce competition in subprime lending by making the regulatory and liability burdens excessively great to those that stay in the market.

So let me get this straight Mr. Frank, you want the government and American tax payers to take on the responsibility of the riskiest loans by expanding FHA guidelines while simultaneously eliminating private funding opportunities for these types of loans? So American tax payers have to pay for people with poor credit to get home loans instead of passing the risk to people who actually want to incur it (MBS investors)?

WTF?