Posted by Tim Burrell - One of the most important factors to allow liquidity in the mortgage market is to allow the mortgage to be sold. To raise the cash to make more loans, the notes from the loans that have been made are sold, particularly by mortgage brokers.  There is a provision in a North Carolina State law recently passed that will effectively eliminate Mortgage Brokers that are not part of a Federally chartered institution. It says that any defense that a borrower has against the originator of the loan, can also be asserted against anyone who purchased the loan. You are talking about defenses that do not appear in the document or the loan application, i.e. but he told me that ...., things that are hard to prove, and rely on statements not written facts. These are things that the mortgage broker is claimed to have done wrong, but has nothing to do with the loan itself.  It sounds logical, if there was something wrong in the process shouldn't that follow the loan? 

For decades this has not been the law, the doctrine is called "Holder In Due Course". Anyone who bought a financial instrument, paid fair value and did not have notice of any defect has a limited number of defenses to deal with. This keeps the price for the financial instrument up, and allows them to be readily traded.  Yes, it is less fair for those few situations where something that cannot be proved is asserted as a defense, but it creates a system where loans can be readily sold.  In other words, it is less perfect in a few situations, but it makes much more money available to many more people who want to buy a home.  In the past, our society made a decision that it was more important to benefit millions or mortgage borrowers, and hamper a few that dealt with immoral mortgage brokers.  This balance just shifted, but only for some of the players.

The North Carolina State Law changes this, but it does not apply to Federally Chartered Institutions, like National Banks. So, the loans originated by mortgage brokers are subject to this, while the bank loans are not. The result, it is hard to sell a mortgage broker's loan or a loan by any institution charted only by the State in North Carolina, but not a national bank's loan. This is a huge change in the competition to originate loans.  One result I have seen is that one of my favorite mortgage brokers went out of business, then found a new place to do business with a national bank.

A Federal law proposed by legislators from North Carolina and supported by Barney Frank, the Chairman of the House Committee on Financial Services, an important voice on financial legislation.  It is being debated in Congress under the title of HR 3915. While it is being amended frequently, one of the provisions that I hope will not be included is this factor that will kill competition in the mortgage industry.   I see nothing wrong with licensing mortgage brokers and requiring certain standards to be in the industry, as regulating those who want to be in an important business is not objectionable.  I object to Congress trying to tell every borrower which loan can be made and which ones cannot.  The market place can determine if a product is sound or not.  First of all, Congress does not understand banking as well as bankers do, and secondly when things change, the banking industry can change, but the laws will lag behind.

The national banks could not have found a better way to eliminate their competition. With less competition, there are less choices for buyers, and less people will be able to buy homes. When my Grandfather was a banker in the 1920's, if you wanted a home, you went to a bank and you played by their strict rules. We are going back to that time. While there are some loans that never should have been made, the vast majority of sub-prime loans are being paid on time and those houses will not be foreclosed. So, all those people got to live the American Dream. Now, only those the bankers like will be able to live the American Dream, a change that will hit "blue collar" workers and minorities harder than the average person, from what I have seen in 28 years as a Realtor.

The Federal laws in HR 3915 will push the lending industry into making only loans that banks like, such as full documentation loans where you cannot finance the cost of originating the loan.  People who do not have substantial funds available and who do not fit into a banker's checklist will not get a home.  Those who buy mortgages will only be protected from additional liability if they buy Qualified Mortgages or Qualified Safe Harbor Mortgages.  If they buy anything else, they will have more problems than they do now under current law, with additional defenses to collecting the loan or foreclosing on the loan.  If the loan is a Qualified Mortgage or Qualified Safe Harbor mortgage, no court can listen to a challenge to that loan.  If it is not, there are new challenges allowed, so very few buyers will exist for those loans.  In short, the banks get richer, the poor get poorer.

The factor that hurt the sale of mortgage backed securities the most is mixing lousy loans with good ones in a pool, and polluting the pool. Jumbo loans are now hard to sell, not because they are a big risk, but because they were mixed with garbage. Jumbo loans are at nearly all time lows as far as defaults are concerned, but they are priced much higher than conforming loans, not because of the risk, but because they need a higher yield in order to be sold.  In other words, the lenders are taking advantage of the jumbo borrowers to make more money without any justification based on the risk.

HR 3915 known as "The Mortgage Reform and Anti-Predatory Lending Act of 2007” should be retitled "No Banker Left Behind" with a subtitle of "No Blue Collar Workers Get a Home".   If you want to read more about his legislation, visit Barney Frank's review at http://www.house.gov/apps/list/press/financialsvcs_dem/press110607.shtml .