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.