New York law drives Freddie and Fannie away

As of September 1st, Freddie Mac and Fannie Mae will no longer be purchasing subprime mortgages in NY due to legislation that is aimed at helping troubled borrowers but also puts more restrictions on those who purchase mortgages to guard against predatory lending practices.

...because of the "potential for heightened legal and business risk exposures." In its decision, Fannie Mae restated its policy by saying "it will not purchase or securitize certain mortgage loans that meet the definition of 'high-cost' or 'high-risk' home loans."

This sounds similar to some of the legislation that states enacted back in 2001 and 2002 that would make entities that purchase subprime mortgages responsible for predatory lending practices involved in the origination of the mortgage. Unfortunately the Treasury Department stepped in on behalf of the banks.

Banks generally give out more in loans than they have on deposit. They can do this by selling off some of their loans to investors. The securitization of subprime loans was a big contributor to the housing bubble. Towards the end of the bubble, the number of conforming loans dropped while subprime and Alt-A loans rose. In addition most of the non-prime loans were securitized which was a large departure from the past. Up until 2002 Fannie Mae and Freddie Mac didn't even deal in subprime. These two companies hold or guarnatee about half of the mortgage debt in the US.

If the GSE's don't buy these mortgages that's a lot of money that won't go back to replenish bank's reserves to allow them to write more loans. In my opinion, this is a good thing. The amount of credit that was issued which caused the bubble caused a lot of problems for borrowers, lenders investors and the economy in general. We need to start returning to a more normal pace of lending and bring housing prices back in line with incomes. 

"New York and the nation got into this crisis in the first place because Fannie Mae and Freddie Mac turned a blind eye to the abuses of loan originators," said Bertha Lewis, executive director of New York Acorn, an advocacy group.

The law also sets in place requirements for lenders in foreclosure proceedings and makes it a crime to write mortgages for borrowers knowing they cannot repay them.

Now that last part is a bit of a shock. You'd think it wouldn't be in a bank's best interest to lend to people they know can't possibly pay them back. But that happened over and over during the bubble. The banks didn't care because they just wanted to have new mortgages to sell on Wall St. It's pretty sad that they had to make a law that essentially keeps banks from shooting themselves in the foot. Kinda have to wonder what all those bonuses were for. My theory was to cash out as much as possible before the crap hit the fan.

With subprime mortgages being harder to sell in the NYC along with other aspects of the legislation, lenders will have less incentives to write bad loans. Without being to write loans to people that can't afford them, they'll have to write loans that people can afford. Since the marjority of the people in the NYC area can only afford a tiny fraction of the housing stock available, house prices are going to need to come down if sellers expect to sell. Otherwise properties will sit on the market for years.

The strange thing is that the law doesn't preclude the anyone from purchasing subprime loans in NY, Fannie Mae and Freddie Mac included. What it does from my understanding, is what previous state legislations tried to do. Put responsibility for predatory lending also on those who purchase these loans so that they would have an incentive to make sure these high risk, high cost loans do not fall into the realm of predatory lending.

Sounds like Freddie Mac and Fannie Mae are afraid to touch NY subprime loans because they might fall under the predatory lending laws. Probably a good idea for the GSE's but what does it say about the companies originating and servicing these loans? Maybe the NY metro area can fall back out of the least affordable housing market spot.