Homeowners May Soon Be Able To Sue Wall Street For Mortgages Gone Bad
October 23, 2007
House Democrats introduced legislation this week that will allow homeowners to sue Wall Street firms for relief from mortgages that the borrowers never had a realistic chance of repaying.
The bill is part of a broader measure intended to restrict what lawmakers and consumer advocates consider deceptive and improper lending practices in the mortgage market. Critics, however, are warning that the bill could chill and perhaps freeze a huge source of capital that has helped push homeownership in the United States to its highest level.
The New York Times reports that the legislation, introduced by Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, would require any mortgage lender to verify that the borrower has a “reasonable ability to repay” based on documented income, credit history and debt level.
The congressman said that he expected his committee to debate and approve the measure next week, and that House leaders hope to bring it up on the floor in three or four weeks. Senator Christopher J. Dodd, chairman of the banking committee there, has outlined a separate bill against predatory lending.
This new set of laws would for the first time give Congress control over the lending practices of private banking concerns. It was proposed due in large measure as a reaction to the so-called subprime loans made in the last two years, products that offered low initial rates but are to jump sharply when the introductory periods expire. Analysts predict that at least a quarter of these loans will go into default, leading to skyrocketing foreclosure rates.
Under the House bill, titled the The Mortgage Reform and Anti-Predatory Lending Act of 2007, people who can show that they never had a reasonable ability to repay the loans would still have to pay for their homes, but would have new statutory power to demand better deals from the lenders. They could demand that their original mortgage lender offer a better loan. Or they could demand relief from the Wall Street firm that bought the mortgage and resold it to investors. The measure would also restrict prepayment penalties and curtail broker fees.
Under the bill, states would set standards for mortgage brokers and lending. States that do not develop a standard would be subject to federal standards developed by the Department of Housing and Urban Development. These standards would require mortgage brokers to act “solely in the best interest” of the consumer.
Right now, this law seems like a good idea - protecting consumers from abusive lending practices. But take a step back and consider what will happen when the housing market bounces back, as it inevitably will. Consumers will once again rush into the marketplace in search of their “dream home.” Many of these people will be young families who have been instructed for years to buy “more house” than they need - in other words, to stretch just a little bit so that they will not need to move as soon as their family begins to grow. These people will be turned away at the door of the bank, told that they cannot qualify for a mortgage because the federal government has doubts about their ability to repay.
That’s right, the federal government is essentially going to become a mortgage underwriter. And you, the honest consumer with aspirations of a better future, will suffer.
Don’t get me wrong - I am not saying that it’s a good idea to rip off the public in the name of aggressive lending. Limiting fees and doing away with prepayment penalties is a good thing, and I’m in favor of that. But I’m wondering whether it’s a good idea to take a knee-jerk position without considering the harm it may cause in the future to people who would otherwise qualify for mortgages.
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