Freddie to New York: Drop Dead

The Wall Street Journal tells us “Freddie Mac Will Stop Buying New York Subprime Mortgages.” The reason? The state has implemented a new category of subprime mortgages, and, horrors, made them subject to “assignee liability”. In simple terms, if you are in the food chain that sold dodgy paper to an end investor, they can go after you, not just the party who originated it (and remember, mortgage brokers often proved to be undercapitalized and many have closed shop, voluntarily or not).

Frankly, this isn’t a bad concept. Parties should be liable for the product they on-sell, particularly since in the land of finance, there are implied warranties and other standards not applicable in the world of goods (such as “know your customer” and fiduciary duties). But the problem, of course, is that the driver of the securitization process is saving costs relative to the old-fashioned “keep it on the balance sheet” model (the big cost there is equity, the next biggest is FDIC insurance). Having everyone in the paper trail do the due diligence required would mess up the economics (recall Tanta’s ongoing theme of how mortgage originators went for efficiency at the expense of having effective controls. Now apply that construct to all the involved parties).

Aside from the cost element, from a practical standpoint, assignee liability is dead on arrival. Unless you have it applied universally (ie, at a Federal level), you’ll see the sort of red-lining that Freddie has announced.

But is this a bug or a feature? The powers that be in New York may have wanted to ban certain types of subprime and found this ruse a way to cover their tracks. However, New York also has managed to get certain other financial products de facto barred in the state thanks to its higher-than-the-norm consumer protection standards. For instance, you cannot get a catastrophic health care policy in this state. I’m not sure of the reason, but it may be due to the fact that New York allows for external appeal for health care insurance disputes. Based on my experience, the examiners seem pretty savvy and not sympathetic to insurance company games, so it isn’t surprising that the insurers would restrict their product offerings as a result.

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  1. Anonymous

    sigh, this is why as an if-I-was-an-absolute-monarch-I’d-turn-American-into-a-Scandinavian-socialist-state, I loath the Democratic party as a governing entity when they control the legislature and executive (though Republicans are no better at one-party rule). The Dems placate their base and implicate policies without thinking through the consequences.

    Here’s hoping that Obama can rid the Democratic party of its old line rubbish, ie the Clintons.

  2. Anonymous

    What is it with these states lately, whats going on?

    Re: Nearly 40 percent of Indiana’s mortgage brokerages lost their licenses Wednesday because they haven’t complied with a new law aimed at raising the standards of the industry in a state with one of the nation’s highest foreclosure rates.

    As of noon Wednesday, 361 of Indiana’s 950 brokerages had failed to meet a Tuesday deadline for complying with a 2007 industry-backed law that requires each brokerage to name a principal broker with at least three years experience who has passed a state exam and will oversee his company’s business affairs.

  3. Unsympathetic


    Au contraire. This is genius. Remember, mortgage originators (call them credit cards, call them home loans.. any way you slice it, it’s still a potato) want to skim profits without assuming risk. This act, however, forces them to (horror of horrors!) make certain their loans satisfy the old-fashioned 3 C’s of lending.

    How dare you make an argument DEFENDING the horrific, brazenly stupid lending which brought about this economic slide.

    Not one ounce of the largesse of Wall Street is worth saving – especially that built on a Ponzi scheme.

  4. Anonymous

    the other reasons are that they could they are out of money ( mkts will not supply) so this is convenient or paulson has told them no more stuffing on the side

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