Now for the scary part of last year's Real Estate Trends Report section "The Hangover". The legislation that is going through Congress becuase of the subprime meltdown.
The legal implications of "The Hangover" will impact the business well into the future. "Mortgage Reform and Anti-Predatory Lending Act of 2007," The bill bars banks from "steering any consumer to a loan that the consumer lacks a reasonable ability to repay, does not provide a net tangible benefit, or has predatory characteristics." A "predatory" loan has never been defined and will surely mean, to a trial lawyer, any loan that a marginal buyer cannot afford anytime in the future. Analysis performed for the Consumer Mortgage Coalition concluded that because of the subjective standards the House bill "will likely generate significant litigation" and lenders will "rarely, if ever, be able to dispose of even frivolous lawsuits".
This legislation adds an incentive for banks to stop lending to all but the best qualified individuals. In the third quarter of 2007 Wells Fargo Home Mortgage halted all subprime lending and Countrywide Financial, the nation's largest mortgage lender, stated new mortgages issued dropped by 40% from a year ago with only 0.2% of the loans classified as subprime compared to a high of 20% only two short years ago. For the foreseeable future low-income homebuyers without stellar credit scores will find it nearly impossible to get any home loan -- which will further drag down home values. The real danger is this aversion will limit lending to even for higher-income home buyers who have less than perfect credit histories.
According to a recent study by Marcus Cole of Stanford Law School who investigated "anti-predatory lending" laws at the state level these "consumer protection" laws in Georgia, Illinois and North Carolina, and found a sharp decline in new loans to moderate-income borrowers. According to the study "anti-predatory lending" has the opposite affect in that instead of protecting the borrower from predatory lenders it is reducing their ability to get any credit. In moderate income areas this means that fewer homes sell and homes values decline.
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