What? What's the point of all this? Those investors who pick up the loans are already taking liability... they're mostly not getting paid. Even those who do get paid out after foreclosure are also taking a huge hit, as a quarter of houses in foreclosure this month are being liquidated at less than the value of the mortgage. After you factor in the enormous costs of the foreclosure and liquidation processes, I doubt any house is being liquidated at above mortgage value currently. And they can't even collect by ditching the security because the only way you can sell it is by getting 30 cents on the dollar for it.

The unfortunate homeowners who are being foreclosed on are getting plenty of pain. Whose fault is all this? Neither those holding securities nor the home buyers. It's the middlemen. The brokers and securities clearers who found someone who wanted to borrow money, but shouldn't have (the foreclosed upon home owner), then found someone willing to dish out the dough (buyers of MBS's) and told them that it was a loan of high quality, backed by the overly rosy ratings agencies telling them all this crap loans with no disclosure of income was AA. Well, it wasn't, and now that's become apparent.

Of course, the middlemen were just trying to make a buck in a low interest rate market of great exuberance and little regulation. Many of them broke no laws or even regulations. Really, it's their fault, and that of government oversight. Congress and the Federal Reserve dropped the ball here, and now want to fix it by going after anyone they can get their mitts on. We need tougher standards on the middlemen. After the loan's been sold on, whoever buys it should not be subject to suit as they are A. not responsible and B. this would kill the MBS market, which is a good market to have, having caused the cost and speed of raising capital to improve dramatically, as well as spread risk.

A few things.

One, is that there was indeed fraud and abusive behavior that was used in these loans. Taking a financial hit is not the same as assuming liability for either fraud or a defective product that causes a person serious harm. If you're driving a car that crashes because of defective equipment that the manufacturer knew to be defective, should you not be able to sue because the manufacturer had to recall the product and is taking a financial hit?

Secondly, there is a lot that is being excused for fear of drying up markets.

Furthermore, the companies holding these securities have been warned about what has been going on for years. They can't claim ignorance.

Otherwise, I agree with you about the lack of oversight.

but securitized mortgages are nothing like cars. the holders of MBS's are totally separate people, entities, and types of people from mortgage brokers, originators or home builders. When Bear Stearns's now defunct multi-billion $ hedge funds bought MBSs or CDOs they saw a multi-million $ pile of numbers. They see "it's AA rated, has a 80% of defaulting on 1%, 4% of defaulting on more than 5%, yields 6.43% annually, and is going for 84 and 1/8" or something similar. They know nothing of who's selling it. They see some batch of names, like WaMu or North Fork in there, and they're reputable. They have no idea that some skeezy real estate broker waaaaaay down the line (on several of the hundreds, if not thousands of loans packaged into this product) fudged the numbers, or got the home builder to front the deposit on behalf of the home buyer in order to move his stock. Bear's funds assumed the mortgages were legit and sold on the (as much as anything is in the mortgage industry) up-and-up. They had Moody's, S&P, and Fitch rating the securities to back it up, and lots of computer models (I have issues with some computer modeling). This approach has its problems, sure. But, Caveat Emptor, these investors have lost a lot of money, and that's how risk works in the capital markets. They lick their wounds, some go bankrupt, the rest survive and hopefully get a little wiser.

In the end, it is the mortgage brokers (who work on commission) and mortgage originators that have been perfidious. These sleazy chop-shop artists (well, some of them. some are fine people, I'm sure, and some are otherwise fine people who resorted to nasty means to compete in a declining overcrowded market, I'm also sure) need greater oversight, and the ability to be punished. These bullshit artists have taken people who should not be borrowing large amounts of money, told them that they actually should borrow it, and then told the capital markets that this pile of toxic loans is "Grade A", essentially lying on both ends, while co-opting home builders (with 7 to 11 months of back-stock in homes they can't otherwise move) to stump up the cash. The government has dropped the ball here, with these jokers, not in the securitization market. The brokers work on commission... i.e. volume. They don't care if the mortgage is good or not, only that a deal gets done. They get paid based on volume, so it is in their interest to get deals done by any means necessary, which can be tough in a falling market. The banks shouldn't, in their own interests, made any loans without knowing basic information such as income, and they're paying the consequences for it.

As for the fear of drying up markets, yes, that's a serious issue that we want to avoid. Still, we can't ignore behavior that destroys people's lives. At the same time, we need to tread very carefully that what we do to fix any problems in our legal system actually targets the behavior and prevents or tempers the problem... instead of merely looking like it does, and letting some Senator a soapbox to destroy other people's lives while he doesn't know what he's talking about, and doesn't care because he's playing the game of "looking like he's doing something". I quite frankly cannot understand the contemporary American propensity to need someone to blame and punish. This is what leads to crappy laws and the phenomenon of suing everyone in sight when something goes wrong (the threat of which impedes many people from doing a lot of things). Look at the problem, and fix it. Punish people if it will help fix it. If that doesn't help fix the problem, why be vengeful? That's not productive.

In response to the above poster who wrote:
"Of course, the middlemen were just trying to make a buck in a low interest rate market of great exuberance and little regulation"
I would like to point out that saying the mortgage industry has little regulation is very inaccurate. Its a month long process of regulation and verification between when a loan is started to when it closes. If a lender is willing to lend under particular guidelines how can you blame the middlemen who provide the services being offered.

In response to Mike's post: "Its a month long process of regulation and verification between when a loan is started to when it closes.".
What state are you doing business in? Majority of the mortgages obtained were all "No Doc" loans and closed within 5-10 days. No opportunity for any oversight and/or for the consumer to re-think the process happening before their eyes. With "Customer Service" as the MANTRA FOR THE DAY due to competition,it was who could do it faster- NOT better,ie. quantity not quality.
This Bill will pass based on the climate we are currently experiencing BUT it's like closing the barn door after all the cows are out! Remember the old saying- better late than never.

Reading the previous blogs points out the obvious with the public and now this government backed bill has no idea how mortgages work.

This bill proposed by Barney Frank is so ridiculous, it is hard to organize thoughts to explain them all. Here are some examples:

1)No yield spread premium...really? If you are currently at 6.75% from purchasing a home 6 months ago (rates at that time) you would not be able to refinance today WITH ZERO CLOSING COSTS at 6.25%...That is today's rate.(closing costs are paid with money from yield spread premium). So if you have a $250,000 mortgage, you could have paid that loan off in 313 months instead of 360 months by ONLY making your current payment of $1,621.49/month. That is a savings of $76,210 ($1,621.49 x 47 months)....If you can't understand this math, don't try to argue this bill. This is a loan that would not be available under Barney Frank's new bill.
How do you think Banks make their money on mortgages? Through upcharging the rate over the so called PAR rate. Interestingly enough banks don't disclose the money they make like a broker does...that makes sense. On average a broker makes about 1.5 points for the same rate a bank charges....hmmm is it possible MANY very intelligent consumers get a BETTER rate than their bank offers? Of course they do.

2)A broker decides what the borrower can afford? This is so ridiculous on so many levels. Does a real estate agent tell a consumer that the house is out of their price range. All CONSUMERS decide what is affordable for them...mortgage professionals offer their opinion. How is not the fault of those LENDERS who make these loans available?(Whom have tightened things considerably)
Do you know what would happen if a broker who COULD get a loan for someone told the consumer that they won't get them a loan that was availabe in the market? That consumer (especially if a minority) could sue that broker for discrimination.

People refinance for basically 4 reasons...To lower their interest rate, to save money per month, or to consolidate bills, or to get cash. It is not anyone's business to decide who should refinance but the consumer and those whom are willing to LEND THEM THE MONEY. As you can see LENDING GUIDELINES were too lose...that is being corrected. It is not the broker who sets the guidelines. A broker is not a babysitter...his job is to let the consumer know what is available in the marketplace and complete their loan by adhering to guidelines, regulations, and verifications that are 5 times that of most businesses....including credit cards and car loans.

You don't need another bill designed to punish mortgage brokers to prevent ridiculous subprime loans. You tighten lending guidelines because (oh really) brokers can't give loans that aren't available from the lenders whom borrowers make their payments to. You crackdown on the BIG LENDERS like Ameriquest and New Century who have their own appraisers who are fluffing values for consumers who are so upside down. These lenders also have their own title companies.

Let me also tell you that 90% of the people not only knew that they were in adjustable rate mortagage but insisted on it because of the lower payment that it afforded them. To say that I am sick and tired of listening to people say that brokers pushed them into it is an uderstatement....BROKERS DONT MAKE MORE MONEY ON AN ARM. In many cases (Especially Conforming Borrowers) it is MORE DIFFFICULT to make money on an ARM. There is no reason for a broker to push an ARM...please stop this pile on of disinformation.

Feel free to contact me and be educated about how the Mortgage Broking business really operates. fwtom@sbcglobal.net

It's remarkable to me to hear the same logic that produced the subprime debacle be used in the discussion to reform the industry. If we accept the premise that all these borrowers not only knew what they were doing, but ASKED for it, then the spike in foreclosures could simply be chalked up to a spate of bad lending decisions by the borrowers.

The reality is, the borrowers didn't change, but the practices and products did. And the further we have gotten away from the paradigm of a financial institution having a simple one-on-one relationship with
a borrower, the more others have intervened with tricky terms and conditions, the more loan defaults and abuses we've seen. It almost makes one long for the days of good ole fashioned S&L redlining.

The common thread to the comments made by Shea, Gomes and Nelson is an inability for brokers, lenders and investors to be collectively accountable. And when I say "accountable" I don't mean the ability to absorb losses, nor do I necessarily even mean punishment for wrong deeds, but for someone to own up to the part they play in an abusively operating industry.

To Mr. Shea's point, the ability of investors' to "stick and move", like a promiscuous sailor, never having to take any responsibility for the product they are investing in, is not an innocent side feature of the foreclosure crisis foreclosure, but an essential contributing factor.

And, Mr. Nelson, obviously, there are lots of honest brokers out there, but to depict them as these quaint, innocent, unfairly maligned entrepreneurs flies in the face of so many people's experience - including my own as homeowner. Making arguments that claim to be in the borrower's interest is not only disingenous, but reeks of the very fast talk and obfuscation that has given mortgage brokerage such a bad name.

Mr. Nelson, I don't spend my time soaking up mortgage industry defenses. But I do know the mathematics of YSPs frontwards and backwards and the impact of them on mortgage lending practices. I used to run a credit union. Now I work directly with people in foreclosure as well as with organizations involved in foreclosure prevention.

Perhaps more importantly, I'm a mortgage holder several times over who has received a home equity loan in which it wasn't fully disclosed the monthly payment I was making was interest only. I've had brokers repeatedly hide information from me and steer me to products that were ultimately not in my best interest.

Homeowners share in the responsibility of the foreclosure crisis, no doubt. We shouldn't hold up all subprime borrowers as passive victims. But I've been witness to alot of abuse and fraud. And it's clear that in mortgage transactions the borrower is the person in the room with the least information at their disposal and the most to lose when the gatekeepers of that information play fast and loose with the information. There are people consumers and there are people responsible for selling mortgage products and underwriting them. How about trying to level the playing field a little bit guys?

In the meantime, Mr. Nelson, you can feel free to contact me and be educated about how reality in the mortgage industry operates.

So Mr. Griffith, if I may attempt to condense the point you make to counter mine, all investors should be mindful of the potential that their investment has to create a system that has the potential to harm someone and should be exposed to the possibility of being sued in a class action for being involved, even at the level of indirectly received the proceeds from proceeds on a security picked up in the open marketplace?

Really? So, like, if I buy a share of a company (whose management I've never met, and I probably know few of their names, if any) that does something bad, I, as a shareholder, can be SUED? I mean, in the same way as the buyers of MBS's engendered a system for raising capital and diversifying risk, shareholders in a company do the same. Say it's a drug company, and their drug makes people sick. Sure, the victims should be able to sue the corporation in a class action, and my share will reflect some pain, but should you be able to come after my assets and drag me through the court system? Hell no. That's the point of a "limited liability corporation". To make shareholders of a company open to being named in class action lawsuits would send our economic system back to the early 18th century, and I equate what you're saying (well, what I think you're saying) as the same thing. Shares, bonds, swaps, MBS's, and securitization in general have created unimaginable innovation in the spreading and management of risk, movement of capital, and liquidity. The liquidity we have today, despite the recent ructions in credit markets, is at a scale unimaginable 2 decades ago, and that has brought down costs and dramatically improved risk management for businesses, individuals, and you and I.