Is Selling a Mortgage a Crime?

Is it a criminal act to grant mortgages to high-risk borrowers at irresponsibly seductive rates and potentially predatory terms and resell a package of them to investors as a mortgage-based security?

If the answer is yes, it'll come from the FBI in the course of their recently-launched investigation into 14 mortgage industry companies targeted for scrutiny.

But if securitization of mortgages is criminalized, will previously free-flowing mortgage money suddenly dry up?

That's hardly likely since home mortgages drive so much of the economy, and Congress will be strongly averse to legislate that economic golden goose out of existence.

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The interest on mortgage loans account for major profits in the mortgage and banking industries. Also dependent on relatively easy mortgage money are the industries which sell the goods and services that go with housing, and the growth of related equities in the major securities exchanges.

Industry lobbyists and legislators will militate against legislation that will negatively impact profitability through overly-tough restrictions.

The practice of bundling mortgages into a portfolio for resale will probably not be outlawed.

A compromise measure might include provisions for mandatory full disclosure of the risk factors in such packages, and a formula might be imposed for determining their dollar value.

Most likely the strictest new laws will be enacted to clamp down on those blatant buccaneers of the mortgage industry from exploiting borrowers with poor credit and luring them into deals they can't afford.

If new laws are enacted, future borrowers may find stricter criteria for obtaining a mortgage and a higher level of due diligence before a lender approves a loan application. But home loans will be made anyway, while theoretically fraud and defaults will be reduced.

Currently, a proposed law introduced by Congressman Barney Frank (D. MA) calls for outlawing a compensation structure known as the yield spread premium (YSP), a not widely understood means by which mortgage brokers reap profits. Some analysts claim that the elimination of YSP will destroy the mortgage broker industry and make mortgages more expensive.

Other measures now being considered by various states include:

The banning of widespread predatory lending practices
Permitting exploited or defrauded borrowers to bring legal action against lenders
Imposing stricter requirements for obtaining a mortgage broker license
Criminalizing mortgage fraud
Initiating an education program for potential home buyers and mortgage holders

But the banking industry will not be forced by law to revert to the simple lending practices of decades past. That would require lenders to give up the many fees generated before and after the granting of a mortgage, to abandon the many new products which opened homeownership to millions, and to forego the profits of reselling a portfolio of mortgages to investors. Most lawmakers will not want to rain on that parade.

Editor's note:
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