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Congress: Wall Street to Blame For Predatory Lending

April 10, 2007

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There's been plenty of finger pointing as the subprime lending house of cards collapses, but two members of Congress -- a Democrat and a Republican -- think Wall Street should shoulder some of the responsibility.

Rep. Barney Frank (D-Mass.), Chairman of the House Financial Services Committee, and Rep. Spencer Bachus (R-Ala.), its ranking Republican, are calling for legislation to do just that. The lawmakers say investors in mortgage bonds should accept some of the liability for the deceptive and undocumented loans lenders make.

In recent years mortgages have been sold to bond traders, who have packaged them into securities and sold them to investors. Subprime mortgages were especially popular because they carried high interest rates to the borrowers and provided high returns to investors.

But as more and more subprime borrowers default on mortgages, the value of those bonds has plummeted, leading to calls from some quarters for a federal bailout. So far, those calls appear to be falling on deaf ears in Congress. In fact, Frank and Bachus want investors and banks to pay up.

In an interview with Bloomberg News, Frank said the growth in mortgage bond trading "provided liquidity without responsibility." He and Bachus want to assign that responsibility, in hopes of discouraging lenders from preying on consumers least able to afford expensive homes, and to make it more difficult for banks to re-sell those loans.

The fact that Frank's proposal has bipartisan support increases its chances of passage and could vastly reduce the number of mortgages traded on Wall Street. The Securities Industry and Financial Markets Association puts the number of mortgage bonds sold last year at more than $2 trillion.

So far, there is no consensus on what exact form the legislation should take. Bachus said he is using New Jersey's 2003 law as a model for federal legislation.

Under New Jersey law, if a homeowner can show their loan was the result of predatory lending, they can sue for compensation from the financial institutions and individual investors who purchased the mortgage.

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