Is it just me, or does this sound like an attempt by Barney Frank to impose an ex post facto liability burden on companies involved in subprime mortgages?

But the losses at Merrill and Countrywide show that the market economy is working as it's supposed to. Companies that made overly risky decisions are having to pay for them, and to adjust their business models accordingly. Over the long run, everyone should be better off as firms learn from the subprime mistake.

The question is whether market discipline is enough, or whether government needs to reinforce it. House Financial Services Committee Chairman Barney Frank (D-Mass.) is working on a comprehensive bill that would impose legal liability on the "securitizers" of mortgage debt. Mr. Frank's proposal would let borrowers sue issuers of bonds that are backed by "no doc" mortgages or other products that do not meet "minimum standards for reasonable ability to pay." To those who suggest that this would chill the mortgage-backed securities market, Mr. Frank notes that the proposed penalties are not unduly onerous. The most a borrower could sue for would be cancellation of a loan and court costs; there are "safe harbor" provisions for securitizers who generally follow sound practices or offer to settle with a borrower out of court. And Mr. Frank candidly replies that, given the recent excesses, the market could use a little chilling.

Now let's consider this. The legislation would make actions that were legal and proper at the time the occurred a form of fraud today -- and allow those who knowingly and willingly entered into contracts sue to cancel their debts. I recognize that these are civil, not criminal penalties, but doesn't this seem to be at odds with our constitutional heritage -- imposing liability where none existed before? I hold no brief for the mortgage industry, but do shudder to think of the implications of this legislation.

Posted by: Greg at 09:37 PM | No Comments | Add Comment
Post contains 323 words, total size 2 kb.