How mortgage-backed securities work
Mortgage-backed securities are pools of mortgage loans that have been bundled together by banks or government entities and sold to investors. Organizations known as mortgage servicers collect payments on the mortgages and send those payments to the investors who bought into the pools. If not for them, there would be limited funding for mortgage lending.
Atlanta’s housing market has been so bad for so long that the last boom (some would say, bubble) is like some feverish, half-remembered dream. Buried somewhere within that dream is an even more elusive memory: For a brief moment in 2002, Georgia had a very tough consumer lending act, designed to prevent some of the very practices that sent the housing market — and with it, the economy — over the cliff.
The housing crisis was a product of complex forces, more powerful than a single law could contain. But the question remains: When Georgia lawmakers rolled back many of the act’s strongest features in 2003, did they throw away safeguards that could have softened the blow for millions of Georgians?
Those who championed the Georgia Fair Lending Act say, yes, absolutely — if left intact, it would have curbed unbridled mortgage lending to homeowners who could not afford to pay. Those who re-wrote the law say, no — if left in place, it would have stopped even the best-qualified homeowners from getting loans, putting Georgia’s housing market in the deep freeze years before the national crisis.
The truth, say independent experts, lies in between — but not right in the middle.
“There wouldn’t have been nearly as many loans being made (if the original law had stood), and that would have been a good thing,” said Dan Immergluck, a professor in the school of city and regional planning at Georgia Tech.
In the five months that the original law was in place, he said, low- and no-doc loans essentially evaporated in the state. When the law was changed, those loans — at the root of so many foreclosures — quickly became popular again.
“We would have had less lending and less risk,” said Immergluck, who watched the debate from the Midwest before coming to Atlanta in 2005. “It would be a short-term shutting down for the highest-risk segments, but the benefits far outweigh the costs.”
Even some of those who opposed the original law say it would have helped, although they differ as to how much.
When the law, pushed through by Gov. Roy Barnes, took effect on Oct. 1, 2002, it was heralded as the toughest in the nation.
It put strict limits on what mortgage lenders could charge people with limited income or messy credit. It also sought to limit the practice of “flipping” mortgages by reselling them to investors, often packaged together with thousands of other mortgages as backing for bonds.
Barnes recently recalled the law as the “toughest bill that I passed” — more difficult, even, than changing the Georgia state flag from the Confederate Stars and Bars. Those arrayed against the bill, he said, included “all the entrenched special interests.”
Barely a month after the law took effect, Barnes, a Democrat, was defeated in his bid for re-election by Republican Sonny Perdue. For the first time in more than a century, Republicans also won enough seats to control both the Georgia House and Senate.
The Fair Lending Act was quickly in their sights, and those of the mortgage industry.
Just as the 2003 legislative session began, the ratings agency Standard & Poor’s said it would stop rating mortgage-backed securities that contained loans affected by Georgia’s law. Those securities are essential, because investors in the securities provide the money lenders use to make mortgage loans.
S&P was spooked because the law made anyone involved in a loan — from the banker to the broker to anyone who purchased the loan — liable if the loan violated the law. There was no cap on that liability, so S&P said it couldn’t properly evaluate the risk investors would face when buying securities that included Georgia loans.
Other ratings agencies said they would follow S&P’s lead, a move that would have effectively killed the market for securities backed by Georgia mortgages and curtailed mortgage lending in the state.
Lenders also started to punish Georgia homebuyers. HomeBanc Mortgage Corp. — one of the state’s largest mortgage originators until it failed four years later — raised the cost of adjustable-rate, interest-only loans. Household Mortgage said it would not purchase any loans that were subject to the law. Other lenders stopped making FHA or VA loans because of vagueness in the law.
Countrywide Home Loans — which was on the brink of failing when Bank of America purchased it five years later — said it would stop accepting applications for subprime loans in Georgia. “No exceptions will be made to this policy for any reason, ” Countrywide warned sternly.
David Sorrell, who in 2003 was Georgia’s acting banking commissioner, estimated in March, 2003, that the state’s mortgage market had shrunk by at least 15 percent since the ratings agencies balked.
Even the law’s strongest backers acknowledged that it needed fixing. The Senate unanimously passed a bill to cap damages, but the House went much further, stripping out or weakening virtually every section of the law. That set off a pitched battle between the two chambers, marked by “profanity-laced arguments, shattered compromises and broken deadlines,” The Atlanta Journal-Constitution reported in March, 2003.
In the end, the Senate narrowly accepted the House version, 29-26. The March vote came after then-Sen. Bill Stephens (R-Canton) said Freddie Mac had written a letter giving the state 48 hours to resolve concerns with the law, or face “real bad consequences.”
The letter, when it materialized much later, said nothing of the sort.
The amended law removed liability from everyone but the loan originator and weakened protections against mortgage flipping. The Georgia drama also stemmed a tide of similar laws that were being considered in other states.
At the time, Joe Brannen, president of the Georgia Bankers Association, said Georgia lawmakers had voted for prosperity. “Their vote will restore the industry,” he said.
Ten years later, Brannen thinks no differently.
“Anybody who says things would be different, I don’t know how they come to that conclusion,” he said. “There’s a myth out there that all this stuff would have been avoided had the Georgia Fair Lending Act been in place. … That’s nonsense.”
But Rusty Paul, who was a Republican state senator from Sandy Springs from 2001 to 2003, sees it a bit differently.
“It would have helped some on the margins, there’s no question about that,” said Paul, who is co-director of the public policy practice at the law firm Arnall Golden Gregory. “It may have prevented some problem loans from being made, but not that many.”
Frank Alexander, a real estate law professor at Emory University, agreed that even if the law had remained unchanged, there still would have been bad loans — but fewer of them.
Proponents of the original legislation point to North Carolina, which passed a predatory lending law that the Georgia Fair Lending Act was based on. At the end of 2012, North Carolina’s foreclosure rate was 30th in the country, while Georgia’s was fourth, according to data from RealtyTrac. Since 2007, Georgia has stayed in the top 10 for foreclosures, while North Carolina has never been worse than 18th.
“Had (Georgia’s law) been left intact, it would have made a very substantial difference,” said Mike Calhoun, president of the Center for Responsible Lending in Durham, N.C.
The threat of lawsuits would have led creators of mortgage-backed securities to look more carefully at the loans they were buying, said Bill Brennan, the retired director of the Home Defense Program for Atlanta Legal Aid.
“We would have had an enforcement tool that could work,” he said. “It would have made a huge difference.”
A huge difference, yes, but a difference that cut both ways, said Hugh Wood, a partner with Wood & Meredith, a law firm that handles complex real estate litigation.
Under the original law, he said, Georgia would have been “plunged into a no man’s land” for as much as a year, as ratings agencies backed away, lawsuits were filed, and only those with stellar credit were able to get loans.
But 10 years later, the depth of the trough the state is recovering from might not be so extreme.
“The bill went too far. It was overly aggressive,” Wood said. “But the cure was too much for the problem.”
»The latest Case-Shiller home sale price report will be released today, and we’ll explain what the numbers mean for metro Atlanta’s housing market and the region’s economy.
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Credit: HYOSUB SHIN / AJC