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Mortgage minefield?

Former fed governor Larry Lindsey, in Friday's WSJ:

One leading proposal is a bill called S. 1299, offered by Sen. Chuck Schumer of New York. Mr. Schumer is a senior Democrat on the Banking Committee and the third-ranking member of his party in the entire Senate, so any proposal he makes should be taken seriously. His proposal represents a regulatory and litigious approach to mortgage-market reform.

The bill requires that each mortgage originator act with "reasonable skill, care, and diligence" and in "good faith and fair dealing." It also requires that all loans are "reasonably advantageous to the consumer." Surely these are noble sentiments. But they are also vague and ill-defined legal requirements that open up the mortgage industry to endless litigation in an environment where juries comprised of homeowners must decide between families in the process of losing their homes and mortgage brokers, investment bankers and other financial intermediaries.

Mr. Schumer's bill makes the ultimate lenders legally responsible for "acts, omissions, and representations made by the mortgage broker." Remember that in the modern mortgage market, the mortgage broker is unlikely to be under the employ or control of the lender. The mortgage may be "owned" by someone who has never seen the borrower or the originator. So, anyone supplying money to the mortgage market may well be taking on uncontrollable and unquantifiable risk in the process....

The home mortgage industry has certainly been guilty of excesses in the past few years. It may be that Sen. Schumer's approach of restrictive regulation and turning the trial bar loose on the industry is the only way to reverse these excesses. But the cost of his approach to every existing homeowner and would-be homeowner is potentially staggering.



Rafael Mangual
Project Manager,
Legal Policy

Katherine Lazarski
Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.