Rep. Frank Pushes for Mortgage Reform Bill

Barney Frank (D-Mass.) has been making a lot of noise about subprime mortgages ever since New Century and Fremont tanked back in late February/early March.  His main thrust over that time has been that people shouldn’t be allowed to borrow more money than they can truly afford to repay.  He is at it again today, hoping to pass new legislation within the next few weeks that would accomplish two primary objectives:

1. A national standard for originating mortgages that will cover every mortgage originator.
2. Liabilities for mortgage securitizers who securitize loans risky (or predatory) loans.

From Market Watch:

The bill creates a national standard for originating mortgages that will cover every mortgage originator, Frank said, including what he called a “common sense” approach to writing loans.

“People should not be loaned money beyond what they can be expected to pay back,” Frank told reporters on a conference call Monday morning. The bill calls for states to adopt rules that would cover originators and contains a fallback federal law if states don’t come through.

At a time when many loans to borrowers with poor credit are set to readjust to higher interest rates, Frank’s bill also imposes some new liabilities on investors that securitize such loans. Treasury Secretary Henry Paulson has recently called on mortgage servicers to modify loans to troubled borrowers. But, say experts, those servicers are obligated to firms who are expecting to make money from their securitized investments.

Frank’s bill aims to “make sure [securitizers are] not selling mortgages that should not have been made in the first place,” he said.

I have yet to see an actual copy of the legislation so I’ll reserve long-winded commentary until that time; but I do have just a few thoughts right now.

1. I’m all for a national standard of mortgage origination for ALL mortgage originators.  As long as this includes every type of originator from broker, to correspondent lender, to federally chartered bank, etc.  If we get everyone making mortgages under the same set of guidelines (a la NASD) it can only be a good thing.  If ALL means just brokers and excludes federally chartered banks the legislation is garbage, period.
2. Penalizing securitizers is an interesting angle but one that (preliminarily at least) seems to vague.  I can understand penalizing the people that underwrote the loans -that is where the culpability lies in determining if people can afford the debt or not - but third party securitizers really shouldn’t be in the business of having to reunderwrite every loan file to ensure they are not securitizing a bad loan.  There’s a lot more to this argument, but let’s save that for when I get my hands on a copy of the bill.

So Mr. Frank, I’ll give you #1, mortgage origination can use some kind of NASD-esque infrastructure; but I’m definitely not sold on #2.  But I don’t have that much confidence in the government figuring out anything this complicated with a set of legislative measures that are put together by politicians who have no more than a 3-month education on how the process works.

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