Now, let’s see if I can get this straight. Representative Barney Frank, a guy who I (used to) have some respect for, has apparently taken up smoking the funny stuff. Only what he’s doing isn’t so funny. He is proposing new legislation allowing homeowners who don’t like their mortgages any more to sue Wall Street firms that sell mortgage-backed securities.
I can see the salivating shysters putting their TV ads together right now and assembling their class action suits. Since when is a Wall Street firm responsible for the day to day decisions or even policies of the companies whose stock they underwrite or sell? If this is allowed, who will want to underwrite / sell / invest in anything? The price of doing business will increase and be passed on to consumers. So in effect the responsible community is being asked to pay one way or another for the irresponsibility of individual borrowers or reckless lenders. If anyone should be suing anyone, it’s investors who thought they were being sold A-graded debt and got garbage. And that’s an SEC issue, not the purview of Dewey, Cheatham, and Howe.
If lenders misrepresent a product, the borrowers have recourse already. And they’d be exercising it if they were in fact defrauded. But the vast majority of these loans gone sour were not misrepresented. The borrowers were fully aware of what could happen to their rates (or should have been if all disclosures were executed and they bothered to read them). It’s no different than the other bubbles in the past–people went nuts over tulips in the 1500s, losing fortunes over investments in bulbs (a sure thing if ever I saw one), then did it again with the South Sea in the 1700’s, paying any price demanded for stock in a company “guaranteed” to make them rich (but no one knew exactly what they did). We got “optimistic” again before the crash of ‘29, and this year we proved once more that history repeats itself–overvalued assets depreciated and investors were surprised. Anyone (lender or borrower) counting on continual crazily-escalating real estate prices to offset the risk of their loans was irresponsible and can’t make it anyone else’s fault.
The lenders, their employees, and stockholders are already paying the price for this recklessness. They are assuming responsibility, pulling in their belts, helping borrowers when possible, and trying to survive. They aren’t claiming the real estate industry mislead them about house values, or that the borrowers mislead them about their ability to pay (stated income loans are just supposed to be for hard-to-prove income, not non-existent income). Lenders are already stepping up.
It would sure be nice if representatives and “over-optimistic” borrowers would try something that can’t be legislated: personal responsibility.
RSS
{ 7 comments… read them below or add one }
Comment deleted by Admin
Nice try. My readers are lenders, not borrowers. And this response does look canned as it doesn’t reference the specifics of my post at all.
I recommend that borrowers in trouble try the following FREE options:
Contact your lender immediately
Contact a HUD-approved Housing Counseling Agency
Toll FREE (800) 569-4287
TTY (800) 877-8339
What a great article Gina. It’s about time borrowers take some resposibilty for their own situations. They always want to blame all their problems on us the lenders. It sure would be nice to not have to make your mortgage payments anymore and want to keep your house. I wish I could do that. Great article.
Gina,
Thanks for the article, although I have a different slant on things. By the way, I am not some conspiracy nut case.
I believe that the government and lending institutions direct us directly or indirectly, as a society and homeowners.
Governments goals are to increase home ownership, as that is good for society. Lenders then have the goal of increasing home ownership, with a pool of products designed to bring in new buyers (thus creating a huge demand on home prices). Many of these new buyers are not anyone who should be homeowners. Others have truly benefited.
LO’s were, in fact, paid really well to sell risky products to lesser qualified individuals. This compensation pushed risky loans to risky borrowers (sounds like a drug transaction doesn’t it?)
Risky loans were then placed in pools which were sold to investors with the best of bond ratings. Lenders bond rate shopped until they found rating agencies who dropped their standards (or “believed” the lenders risk assessment). What did the bond rating agencies get for their obfuscation? FEES, GIANT FEES.
There are statistics, which appear to have been ignored, for risky borrower scenarios, thus giving a higher bond rating, from our trusted rating companies (do investors trust them in the future? Hmmm.) And that is a real issue! Trust?!
The current credit problems are not simply, “the borrowers should have known better”. Lenders had the statistics, bond agencies should have asked to see the statics, not the green. Investors should look at who to believe about true risk, now that they can’t believe the bond rating agencies. But….
This too shall pass, as did the S&L debacle of the 80’s. It looked like it would overwhelm our economy, it didn’t, but the causes were similar. Partly government ineptitude, partly shrewd opportunists taking advantage of economic situations provided by same.
At what economic cost? To whom? How long will it take the pig to work it’s way through the snake? What does government do next? Think “Too big to fail” It worked before and will again.
This too shall pass, our economy is huge. Interesting question is how long the world will continue to take our risky “AAA” rated bonds. Right now the squawking isn’t high. We will make it through, given time.
And thanks for your time!
Dick, you make some great points. I agree that home ownership confers many benefits on society in terms of stability, lower crime rates, improvement in schools, etc. and the government is right to push it (helped along by a powerful real estate lobby).
I agree that LOs did sell risky products to borrowers when borrowers wanted them. However, I stand by my statements that borrowers are the only ones responsible for what they commit to (and as an LO I made less on subprime/option products because I had to broker those out and disclose the YSPs — FHA loans paid the most bps because we got a better SRP for them), that lenders who service their own loans made reckless underwriting decisions and are paying the price, and that the only ones with legitimate gripes are in fact investors who didn’t get what they thought they were buying. Which leads back to the SEC and other agencies. Individual borrowers have no standing in this case and have no business suing Wall Street. If the lender did in fact defraud the borrower there are appropriate options. There is an interesting article in this week’s Economist about the cost of regulation in this country; allowing trigger-happy litigation in this instance just drives the costs up for all of us.
I could not agree more. I have been in the lending business for 18 years from a loan officer to head of trading at Impac companies.
As a loan officer I was working directly with the borrowers before we had “Stated” loans but the rule was that you NEVER gave someone a loan that you felt they couldn’t pay back.
The fact that these borrowers are claiming ignorance is outrageous. They sign a multitude of disclosures; they get rescission periods and a chance to say “I can’t make that payment”!!!
Mortgage Bankers and Wall Street Firms are paying the price. I am now advising on selling these pools of loans that are made up of lying borrowers not making their payments. The lenders are lucky to get 60 to 70 cents on the dollar. Can someone tell me why Wall Street Investment Banks and Mortgage Bankers would lie to make a quarter of a point, if they were going to eventually lose 30 points?
We as an industry did not police the “Stated” loans well enough but we certainly did cause the problem.
Everybody loses.
Chris Castoro
FDIC Capital Group
Not only lenders but borrowers should take charge and responsibility their own condition, borrowers also need to work to find option and alternatives, its not only lender or borrowers side both have to participate to cure tough situation