Freddie Mac says no more subprime from New York. New York not surprised

I'm a little confused. I thought Fannie and Freddie didn't deal in subprime loans.

Wasn't taking out loans for people who were high risk, well, high risk? And now that NY has implemented some common-sense legislation Freddie Mac is saying “no, thanks, this exposure is too risky?” Mind boggling. Maybe if the entire business world worked on their ethics and scruples and not how to squeeze money out of every Tom, Dick and Jane the real root of some of issues can be addressed. At the same token, consumers need to take responsibility for what they get into and not live with a level of debt that puts them in over their heads.

It is worth noting that regulation can also increase the risk of making certain loans by imposing heavy fines and penalties on both originating lenders and loan purchasers. What's more, there is arguably reputational risk in making loans that regulated by these sorts of laws. During the first half of this decade many states passed anti-predatory lending laws which prohibited certain terms--such as prepayment penalties, negative amortization or balloon payments--on loans with APR's or points and fees above a defined threshold. In response, most mortgage institutions stopped making or purchasing "high cost" loans--i.e. loans that were above the set thresholds--whether or not such loans contained the prohibited terms and thus violate the law. (Keep in mind that policy does not always match actual practice and not all lenders maintained effective compliance controls to prevent predatory lending practices.) In some states, for example Georgia, the anti-predatory lending laws had to be amended because they had such a dramatic impact on mortgage liquidity and financing options. The New York law is a variety of new vintage of laws that apply to a much larger universe of loans than their "high cost" or "anti-predatory" forerunners. This is because these laws--often called "subprime" or "rate spread" laws--have much lower thresholds. Of course, it is not uncommon for well-intentioned lawmakers to enact legislation that in fact hurts a population it sought to protect. The current credit crisis (and the irresponsbile actions of many lenders and borrowers alike) are providing a rare election year opportunity for politicians to are keen at sniffing out issues that appeal to voters. Hopefully this will not result in laws that further dislocate an already broken market.

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