Mortgage industry speaks out on assignee liability [2008-11-13]

WASHINGTON - Mortgage investors could turn their backs on the market if they are forced to pay for flawed loans written by other lenders, several financial services industry representatives told U.S. lawmakers Tuesday.

A mortgage investor "needs to know that he won't bear responsibility based on conduct by parties outside of his control," Howard Mulligan, an attorney who specializes in the mechanics of selling home mortgages to investors, told a Congressional panel.

Regarding assignee liability, which would make mortgage investors share the risks of defaults on fraudulent home loans, Wells Fargo home mortgage lending chief Cara Heiden said: "I am of the opinion that we shouldn't go there."

But a borrower advocacy group argued that investors could calculate assignee liability like any other cost.

"The secondary market measures risk and allocates that risk" and so can calculate the potential costs of homeowner suits, said Michael Calhoun, president of the Center for Responsible Lending.

Tuesday's panel before the House of Representatives Financial Services Committee discussed how to help troubled borrowers of subprime mortgages -- which involve those with damaged credit -- who are now facing foreclosure.

An increase in delinquencies and foreclosures among subprime borrowers has prompted several hearings before lawmakers who are considering new laws to aid borrowers.

At Tuesday's session, lawmakers also asked whether the terms of some shaky loans could be changed before foreclosure.

Modifying the terms of troubled subprime loans can help borrowers and save mortgage investors from losses down the line, a senior official from Moody's said.

"We believe loan modification can typically have positive credit implications for securities backed by subprime loans," said Warren Kornfeld who heads the residential mortgage-backed securities (MBS) rating group.

Mortgages offered to borrowers often pass through Wall Street and end up in the hands of investors as MBS.

Members of the House and Senate have floated the idea of an assignee liability standard that would push some costs of failed loans upstream from the borrower to the mortgage investor.

Many Democratic and Republican lawmakers have cited as a model a New Jersey law that allows mortgage fraud victims to sue for damages but protects investors who take steps to make sure the loan is proper. Such due diligence steps can shield investors if the loans turns out to have been flawed.

Donald Lampe, another attorney who works on mortgage investments, told Tuesday's panel that an assignee liability statute that was too strong could spook investors with the fear of homeowner lawsuits and "impair the secondary mortgage market".

Lampe works with Womble Carlyle Sandridge & Rice while Howard Mulligan is an attorney with McDermott Will & Emery LLP.