Mr. Frank’s electioneering is currently aimed at the mortgage market:
Mr. Frank’s proposal is a trial lawyer’s dream. It would forbid banks from signing up borrowers for “overly expensive loans”; require banks to make sure that the consumer has a “reasonable ability to repay the loan”; and insist that loans must be “solely in the best interest of the consumer.” This kind of murky language would invite litigation from every borrower who misses a payment. If it becomes law we can expect to see billboards reading: “Behind on your mortgage? For relief, call 1-800-Sue-Your-Banker.”
Also for the first time, banks that securitize mortgages would be made “explicitly liable for violations of lending laws.” This is a version of secondary liability that holds the bundlers and resellers of mortgages responsible for the sins of the original lenders. The reselling of mortgages has been a boon both to housing liquidity and risk diversification. So to the extent the Frank bill adds a new risk element to securitizing subprime loans–and it surely will–the main losers will be subprime borrowers who will pay higher rates if they can get a loan at all.
What will happen:
- If you think the anal exam involved in getting a mortgage is rough now, you haven’t seen anything yet, when lenders, facing huge potential liability, try to jump the hurdles in the first paragraph of the excerpt.
- Frank’s proposals won’t only affect the subprime market, which will virtually disappear. They will ripple upward into the conventional mortgage market. Almost all borrowers will have a tougher time getting approved than is warranted.
- Fees and/or rates will go up considerably to cover the additional over-the-top due diligence costs.
- The number of lenders able to function in the new framework will go down considerably, leading to further financial services industry consolidation.
Oh, and minorities, who make up a disproportionate share of the subprime market for a reason, which is that they disproportionately have less-than-perfect credit, will find the dream of home ownership less achievable.
The real answer to all of this is to aggressively prosecute the crooks who have made deceptive and predatory loans, while improving financial education in general in schools and, to the extent they can afford it, at employers for employees and at financial institutions for their customers and communities. It isn’t to ruin the entire mortgage market — unless your agenda, as appears to be the case with the congressional majority, has nothing to do with keeping the economy going.