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46, # 40 | October 1, 2007

GuestView
Assigning blame needs to take a back seat to restoring
confidence
By ROBERT M. PARDES
Feature Section

Ask Andi : Go with the ebb and flow

It is times of crisis that define those who can help and are part of the solution and those who
can hurt and are part of the problem.
Grapevine : Second-class highway
As the nation wrestles with dysfunctional housing credit markets and the attendant implications
to the economy, those with the capacity to restore order - namely our politicians and regulators
Profits & Passions : Richard Mishkin - need to understand where they can be most effective in meeting the near-term challenges
and establish priorities on that basis. Up to now, the response has largely been centered on Blog Section
ViewPoints the cause of the crisis and the placement of blame. However, for now, the sins of the past
GuestView : Robert M. Pardes have been dealt with swiftly and violently in the form of trading losses, bankrupt lenders and
hedge funds, job losses and, of course, defaulting homeowners.
Assigning blame needs to take a back seat to
restoring confidence When the lending environment is dominated by fear and uncertainty, lower interest rates and
greater access to liquidity in the banking system are of limited utility. The tourniquet that is
OurView : Drillers and preachers best bet for loans
needed to stop the proverbial bleeding is threefold:
Focus Section : Autumn in the Valley • Restore confidence in the acceptability of underwriting standards that go beyond the rules
applicable to loans eligible for purchase by Fannie Mae and Freddie Mac or FHA guarantee.
Techcetera : • Bring to a halt any discussion of the possibility of imposing liability on assignees (purchasers)
Virtual success The software drive to mothball the of mortgage debt.
‘big iron’
• Be surgical rather than general in terms of guidance that encourages leniency to defaulting
On the Record : borrowers.
Credits, Clients & Awards
Loans with limited documentation as to income, assets or employment were around years
Newsmakers before the recent housing boom and have proven to be sound in terms of risk-adjusted returns.
On the Agenda The problem was never the widespread availability of these features, but the layering of risks
that occurred when these features were combined with little or no equity contribution by the
Public Notices
borrower. Nevertheless, the perception that the regulators in general now frown upon these
Real Estate Update features even with equity contributions by the borrower of 20 percent or more of the property’s
value has severely cut back on the availability of products that have comprised core demand
Fairfield Archive and that serve to bridge the socioeconomic diversity that has been the hallmark of our nation’s
homeownership goals.
Regulators are urged to lift the chill by providing affirmative guidance that encourages, if not
trumpets the availability of nonconforming or reduced documentation under the standards that
prevailed prior to the height of the housing boom in 2003. Calling on the collective expertise of
Google Search lenders, rating agencies and investment bankers may be an expedient path to bringing
certainty in the form of an endorsed menu of products likely to support improved access and
demand for homes while curbing the excesses that were the culprits in the first place.
Web FairfieldCountyBusiness.com
As to assignee liability -- the concept that buyers of mortgage collateral should be accountable
for the wrongdoings of lenders, mortgage brokers and other participants in the mortgage
originations process -- our legislators need to step back and understand the “circle of life.”
Loans are originated, many are sold to institutions that aggregate the loans, structure liquid
securities, arrange for a rating of the securities and distribute the securities to banks and
pension funds all over the nation and the world. That’s right, the ultimate “assignee” is our own
savings and retirement funds. Moreover, given the complexity of the chain of ownership and
the fact that any additional exposure will be incorporated into rating assumptions and increase
the cost to homeowners, the imposition of assignee liability is little more than a fool’s errand
and the primary beneficiary is not the homeowner but the hordes of litigators drooling over the
prospect of replacing defendant service providers -- typically sole proprieto
Finally, we are all concerned about the prospect of projected annual foreclosures in the range
of 2 million. No one wants to see homeowners who have been misled into unsuitable products
suffer the humiliation of foreclosure. However, the instinct to do good should be tempered with
the practical understanding that there are many defaults where the homeowner never had
equity in the property and has only played with the house’s money. Moreover, to the extent
that all constituencies are in agreement that a vibrant secondary market benefits all, then there
is a need to provide investors with reasonable predictability as to the cash flows generated by
mortgages. Guidance that is too general in nature will quickly become the tool of attorneys and
dubious credit counselors to encourage defaults as a means to obtain more favorable terms
than originally bargained for. The cost of less predictable cash flows will be borne by those
most deserving affordable homeownership.
Amidst all this uncertainty, the one certain thing is that liquidity will return to the capital
markets, a vibrant mortgage-backed securities market will re-emerge and homeownership will
generate the modest long-term returns that we have grown accustomed to. Money funds and
managers simply cannot earn their keep by directing the flow of funds into short-term
treasuries and agency securities. The question is how long and how much pain will be endured
to get there.

Robert M. Pardes is a lawyer who specializes in residential and

commercial mortgage financing and banking.

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