Legal Developments Affecting the Subprime Mortgage Market

Abstract

In light of recent events, the legal framework in which the subprime mortgage market operates is changing. New federal and state regulations will fundamentally affect the way institutions in this market do business, at least in the short term and until the housing crisis is resolved. The centerpiece of the new framework is the Statement on Subprime Mortgage Lending released by the federal banking agencies. This statement has been supplemented by parallel state guidance in a significant number of jurisdictions and also by complementary guidance issued by Fannie Mae, both of which will affect a large number of institutions not regulated by the federal agencies. Several states have also passed new laws requiring lenders to verify that borrowers have the ability to repay their loans, often at a fully indexed, fully amortizing payment, and also to certify that refinance transactions have a tangible benefit to the borrower. This growing panoply of federal and state underwriting regulation has been joined by efforts to encourage workouts, loan modifications, and other loss mitigation techniques to avoid foreclosure. It remains to be seen whether these new regulations will be effective. However, it is clear that lenders, investors, and borrowers will all have to tread carefully in this new regulatory environment.