1-800-Sue-Your-Banker?

A Sarbox for Housing - How to restrict lending to the poor for years to come

Excerpts:

Throughout the 1980s and '90s, Congress prodded, even strong-armed, banks into making more mortgage loans to low-income and minority families. Washington enacted anti-discrimination and community lending laws with penalties against lenders for failing to issue riskier mortgages to homebuyers living in poor neighborhoods or with low down payments and subpar credit ratings. And so it was that the modern subprime mortgage market was born.

Now, and for a variety of reasons, some two million of those loans have gone sour, and the same politicians are searching for villains. Leading the charge is House Financial Services Chairman Barney Frank, who is accusing banks of "predatory lending"--by which he means making loans to the very group of borrowers that Mr. Frank and his colleagues urged banks to serve.

As early as today, Mr. Frank plans to hold a committee vote on his Mortgage Reform and Anti-Predatory Lending Act of 2007, which would impose new rules and financial penalties on subprime lenders, while providing new lawsuit opportunities for distressed borrowers. "People should not be lent money that's beyond what they can be expected to pay back," Mr. Frank says. Now, there's an idea. Why didn't the bankers think of that?

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."
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No one disputes that there were lending excesses during this decade's housing revels. The Federal Reserve's easy money policy created a subsidy for debt and fed an asset bubble that made borrowers and lenders alike think prices would rise forever. If companies or individuals committed fraud, they should be punished. Meanwhile, federal regulators have been rewriting rules to outlaw the most abusive practices, such as onerous prepayment penalties and disguised balloon interest payments.

But for all the demonizing, about 80% of even subprime loans are being repaid on time and another 10% are only 30 days behind. Most of these new homeowners are low-income families, often minorities, who would otherwise not have qualified for a mortgage. In the name of consumer protection, Mr. Frank's legislation will ensure that far fewer of these loans are issued in the future.


Comment: Congress helped create the mess through "anti-discrimination and community lending laws with penalties against lenders for failing to issue riskier mortgages to homebuyers living in poor neighborhoods or with low down payments and subpar credit ratings" ... and now some want to punish lenders for enabling lower income families to own a home! Amazing!