BOCA RATON, FLA. - The subprime mortgage market has enjoyed a year of increased growth in the face of rising interest rates. But stringent new regulatory legislation threatens to undercut nearly all issuers in the sector. This is of particular concern in Massachusetts and New Jersey, said participants in the Dynamics of the Subprime Mortgage ABS Market panel at ABS East.
"In a few weeks [Massachusetts] will have a law take effect that will become, after New Jersey, the next Georgia," said Alan Krinsman, partner at Strook Strook & Lavan.
"Things have improved in New Jersey...but there is still disagreement between rating agencies whether or not to put these loans into securitizations."
Given the uptick in CDOs sourcing collateral in the mortgage market, decreased availability to underwrite mortgages can affect more areas of the asset-backed market than in prior regulatory situations.
Krinsman noted that roughly 20 states have enacted similar predatory lending laws, but on a federal level, there is some movement in the House to create a national standard that would pre-empt state laws. "But you have to be careful what you wish for," said Krinsman. "[Federal standards] could come down even more stringent." He encouraged lenders and players in the sector to watch regulatory developments more closely, while acknowledging it can be a costly task to do so.
"It's very hard, we have five full time in-house attorneys," in addition to other legal resources, noted Ray McKewon, executive vice president of Accredited Home Lenders.
More often than not, deciding where to lend not only comes down to what the law is, but the fact that many laws are poorly written and unclear, McKewon explained. "[Accredited] employs program system stops. We do not allow a loan to proceed with violations," he stated.
With coverage in 50 states, interpreting the law - region by region - proves a daunting task, and in some cases too daunting. "Lenders need to consider if they can generate enough [business] to justify the risk of being in that jurisdiction," McKewon noted, adding, "Time and time again, we say no, we do not want to."
While predatory lending may not be a focus in the presidential debates, Krinsman provided a small snapshot of the potential policies of Democratic challenger John Kerry. "Kerry's proposal sets a very high bar. But it explicitly does not pre-empt state law."
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