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Frank's Proposal Will Bring Opposite Effects

Apr. 08, 2009 3:19 AM ETXLF, KBE, RKH5 Comments
Bill Bost profile picture
Bill Bost
2 Followers

Rep. Barney Frank has proposed legislation related to financial regulation that he says is intended to "stop people from getting loans in the future that they can't repay." I am all for that. Think about it -- no more collection agencies, no more bankruptcy courts, no more foreclosures, rates at the Treasury rate on your credit cards. What Nirvana!

In all seriousness, Frank's proposed restrictions on securitization of subprime loans are akin to the Faustian practice of giving patients medicine that purportedly is good for them which in truth killed them slowly instead.

The problem we have now is a housing market with too much inventory. As a general rule, an investor/landlord will pay less for an unoccupied house than a mortgagor who buys a home as a primary residence. We have to assume (i) that buyers who are currently qualified for a loan have decided not to buy or already own a home and (ii) that there are not enough willing and able investors to purchase the homes at their current market prices; if either of these were untrue, we would have no housing problem. Under these circumstances, the greatest pool of new buyers, maybe the only pool of new buyers large enough to solve the problem, are people who can't qualify for loans under current lending guidelines -- namely, the subprime mortgage customer.

Thus, while Frank is correct to attack "subprime loans", he should be encouraging lending to "subprime" customers. This is just not happening now in sufficient numbers and, by restricting lenders' access to capital to make subprime loans, Frank's proposal ensures that it doesn't.

So, you say, "that is how we got into this mess, by making loans to borrowers who couldn't repay the loans". And you are right. But now we have the problem. Why not let "subprime" borrowers finance home purchases even

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Bill Bost profile picture
2 Followers
I am a lawyer with 19 years' experience in the practice of business law and related areas. My practice consists of representing large and small businesses in a variety of corporate and financial matters. I have experience in the following: * General Business Law * Entity formation (C and S corporations, partnerships and LLCs) * Shareholder and employment disputes * Stock and asset sales, purchases and capital transactions * Commercial real estate financing and development * Residential real estate financing and development * Mortgage banking * Residential and commercial closings * Government relations and lobbying * Government subsidized housing (HUD Section 8 and IRC Section 42) * Consumer finance regulation AUTHOR: Interstate Banking: A Guide to the Fifty States, 1995 What Does Right Mean? Developing an Ethical Business Environment in the Mortgage Industry, 2004 North Carolina Mortgage Lending, 2008 Visit Bill's website: ncmortgagelaw.net (http://www.ncmortgagelaw.net)

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