Over the past six months, we have all witnessed the downturn in the housing market in Orange County as well as throughout much of the United States.  While roughly 95% of homeowners are paying their mortgages on time, there are millions of homeowners holding mortgages that have defaulted or may default in the near future. In 2008 alone, $350 billion worth of mortgages will adjust up to higher rates.  These are sobering numbers which threaten an otherwise strong economy.  

Unfortunately, however, some of my colleagues in Congress are using the current turmoil in the mortgage industry as an excuse to further empower the trial bar. Some of their proposals have the potential to cause irreparable harm to our financial markets.  For instance, last November the House passed legislation known as the Mortgage Reform and Anti-Predatory Lending Act.  This legislation is a trial lawyer's dream. It would prevent banks from offering their customers "overly expensive loans"; require banks to make sure that the consumer has a "reasonable ability to repay the loan"; and insist that loans must be "solely in the best interest of the consumer."  Without sufficiently defining these terms, this bill leaves it up to the trial lawyers and judges to determine the extent to which banks are responsible for their customers' ability to afford a mortgage.  The Wall Street Journal quipped that if the bill becomes law we can expect to see billboards reading: "Behind on your mortgage? For relief, call 1-800-Sue-Your-Banker."  Unfortunately, this increased exposure to possible lawsuits will undoubtedly drive up the cost of doing business, resulting in higher costs to all consumers and fewer products available in the market.

Another major flaw in this legislation assigns legal liability to mortgage securitizers in the secondary markets (referred to as assignee liability) with the intention of correcting errors in the mortgage origination process.  If we can learn anything from the market turmoil over the last few months, we should understand that the problems in the mortgage sector have already impacted capital markets around the world.  The ability to securitize and distribute mortgages throughout our capital markets has been a major contributor to the success we have witnessed in the housing sector over recent decades.  It has spread risk around the world and provided millions of Americans with the credit necessary to purchase or refinance their mortgage.  If an assignee liability provision is improperly applied, players in the secondary market will simply refuse to purchase loans that expose them to potential legal liability they cannot determine or quantify.  The likely result will prevent many credit-worthy borrowers from receiving financing and the current credit crunch will spread even further.

The House Judiciary Committee recently passed legislation that could potentially have an even greater negative impact on our capital markets.  If passed, the bill would allow bankruptcy judges to reduce the amount that a borrower owes on a mortgage--while letting the owner keep the property.  While this may appear to be a win for troubled borrowers, lenders would be forced to question the security of all loans made in the future.  The increased uncertainty will likely result in more expensive mortgage loans for everyone.

Both of these bills have the potential to decimate an already beleaguered mortgage industry and freeze up the little credit currently available.  Increasing the ambiguities faced by mortgage providers will increase the cost of doing business which will undoubtedly be passed on to consumers.  I hope the Bush Administration will heed these warnings and veto these "solutions" when the time comes.