For the last few years - perhaps as many as eight or ten - there have been increasing reports of abuses in subprime lending. Folks that could have/should have qualified for a "better" loan, didn't. Credit worthy borrowers were charged multiple points and high interest rates. The consumer wasn't saavy, didn't speak the language, or didn't shop around. Sometimes there was even elder abuse.
Instead of holding fraudulent individuals and/or companies liable, various states have attempted to label "high cost loans" as fraudulent, usurious and have attempted to regulate them into extinction. The latest iteration is in the state of New York. New York's new regulations deem the investor [the ultimate purchaser of the note] liable for any irregularities in the loan.
Let's recap the flow of money; the loan is "originated" by one company, sold to the initial investor/bank/mortgage company who then re-sells it in huge blocks to the "investor". This final investor is often made up of retirement funds, investment pools and mortgage backed securities that are sold on the stock market.
Let's say you had your choice between two stocks with a similar return; Google stock or a mortgage back security - that may be able to sue you for sub prime loans buried in the portfolio - which stock would you execute?
I totally get that these states are trying to "protect" their voter base. The problem is that high cost loans have a place and making the investor liable just means that the investor won't spend their money there - any money. In our internet world, the liquidity market is not limited to geographic regions like the old community banks. Putting the investor at risk just makes the grass so much greener anywhere else.
New York Versus Freddie Mac: Round One
Instead of holding fraudulent individuals and/or companies liable, various states have attempted to label "high cost loans" as fraudulent, usurious and have attempted to regulate them into extinction. The latest iteration is in the state of New York. New York's new regulations deem the investor [the ultimate purchaser of the note] liable for any irregularities in the loan.
Let's recap the flow of money; the loan is "originated" by one company, sold to the initial investor/bank/mortgage company who then re-sells it in huge blocks to the "investor". This final investor is often made up of retirement funds, investment pools and mortgage backed securities that are sold on the stock market.
Let's say you had your choice between two stocks with a similar return; Google stock or a mortgage back security - that may be able to sue you for sub prime loans buried in the portfolio - which stock would you execute?
I totally get that these states are trying to "protect" their voter base. The problem is that high cost loans have a place and making the investor liable just means that the investor won't spend their money there - any money. In our internet world, the liquidity market is not limited to geographic regions like the old community banks. Putting the investor at risk just makes the grass so much greener anywhere else.
New York Versus Freddie Mac: Round One
New York Versus Freddie Mac: Round OneTechnorati Tags: subprime lending, lending meltdown, law of unintended consequences
By Peter G. Miller
It’s fight time in New York. On one side is newly-passed state legislation which sets tough standards for subprime and “high cost” loans and on the other is Freddie Mac, which says it won’t buy such loans in the state after September 1st, the day the new law goes into effect.
This is a big deal because if New York lenders can’t sell mortgages to buyers such as Freddie Mac, they simply won’t make such loans. You can guess what happens next: No subprime loans, no high cost loans, no buyers, no sales. A big chunk of the real estate market will close down.
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