Lawmakers in various states and cities are aiming legislation at so-called predatory lending, and in a handful of jurisdictions, including Oakland and Los Angeles, the laws have “targeted not just mortgage lenders and brokers who engage in dubious practices but also investors who buy securities backed by even a single mortgage later deemed predatory.” The laws make provision for something called “unlimited assignee liability,” which “puts investors in mortgage-backed bonds on the legal hook for misdeeds by lenders and mortgage brokers”. The idea is “to force investors and their agents to act as policemen against predatory lenders and to provide plaintiff lawyers with deep-pocketed targets for predatory-lending suits.” To make matters worse, “many advocates of the new laws use an expansive definition of predatory lending that classifies as evil a mortgage with high interest rates or fees, a prepayment penalty or even a provision requiring arbitration.” One likely result is to drive capital away from the housing markets of the cities involved: “Standard & Poor’s and Fitch, which rate mortgage-backed securities before they’re sold to investors, say they won’t rate mortgages covered under Oakland’s ordinance (and some under Los Angeles’) because the risk to investors is impossible to quantify.” How long do you think before investors fleeing the new legal risk will get accused of “redlining”? (Ira Carnahan, “Predatory Lawmaking”, Forbes, Jan. 12).

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