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2009-04-06 10:26 by Karl Denninger
in Housing Ignore this thread
When All You Have Is A Hammer...

From the LA Times (tanks guys on Tickerforum for the linkey!)

Reporting from Washington -- Top legislators on Capitol Hill are preparing to take up a comprehensive plan that would fundamentally reform the home mortgage market, starting this year.

Had the proposed rules and standards been in place earlier in the decade, say congressional supporters, they could have eliminated much of the funny-money loans, slipshod underwriting and Wall Street abuses that distorted the market from 2002 through 2006. The boom wouldn't have been as big, and the bust might not have happened.

The article goes on to then go after a bunch of practices and issues, but includes and focuses on compensation.

I have no quarrel with quality requirements for loans - it's called underwriting and not doing it, while claiming that a loan has any sort of quality at all, is quite simply criminal fraud.  We need no new laws in that regard - if you can find some sucker to buy a loan from you who you honestly represent as having had zero underwriting, with no reason to believe that what was represented by the borrower is true, and in fact plenty of reason to believe that it was all a lie, I wish you the best of luck.

The fact of the matter is that nobody in their right mind would buy that sort of paper at a coupon less than credit card paper, which is "verified" to a level no more stringent than a quick FICO score check in most cases.  Since mortgages at 15 or 20% are hard to sell to consumers that problem is self-correcting.

The simple solution is to impose fiduciary responsibility on anyone who interfaces with the public in making a loan.

This does not bar loan officers from being paid for rate, but it does bar a loan officer from being paid for rate if its not the best deal for the customer, because their duty is then to act as the customer's agent, not the lender's.

This is how it should be.  You are engaging the lender on your behalf and the entire reason he is earning money is as a consequence of the consumer's transaction. 

We need do nothing more than impose fiduciary responsibility and enforce strict liability up and down the board for fraudulent representations, whether performed by omission or commission.  Make that liability both civil and criminal, with real teeth - 5 year felonies for each borrower you screw, and on the civil side give the borrower the right of recission plus treble damages (much like for Racketeering, which is basically what this is!)

This bill as written is intended to favor bank-based lenders at the expense of independents (big surprise - NOT!)

While the independent shops brought this on themselves through their refusal to self-police and the rampant "boiler room" style operations during the boom years a "solution" that doesn't attack the actual problem - lack of fiduciary responsibility - will only shift the exploitation of the public into other channels rather than eliminate it.