Mortgage shoppers in Georgia might discover this week that they can't get a loan or even a rate quote. Blame it on Georgia's anti-predatory lending law.
The Georgia Fair Lending Act, or GFLA, is the farthest-reaching anti-predatory lending law in the nation. It is designed to protect elderly, poor and unsophisticated borrowers from lenders who price-gouge or make loans that can't be repaid.
When the law went into effect Oct. 1, Georgia's mortgage lenders and brokers predicted that it would create a credit crunch. No one guessed that a bond-rating agency would make that forecast come true.
But that could be the result of Standard & Poor's announcement late last week that it would no longer rate mortgage-backed securities that include loans covered by GFLA. Don't worry if you don't understand that; I'll explain below. The upshot is that Standard & Poor's announcement could start a chain reaction that shuts down Georgia's mortgage industry.
"I'm hoping it won't take someone sitting at the closing table and the attorney coming in and saying, 'I'm sorry, we can't close your loan.' I'm hoping that's not what it will take," says Bob Long, a mortgage broker in Marietta, Ga., who hopes legislators will repeal the parts of GFLA that triggered the action by Standard & Poor's.
Some lenders pull out of Georgia
A few mortgage brokers and lenders say they will stop lending altogether, or restrict the types of loans they offer, in reaction to Standard & Poor's announcement. They make subprime, loans -- mortgages for people with flawed credit histories -- as well as low-documentation and interest-only mortgages to people with excellent credit. None of the lenders are household names. They include EquiFirst Corp., AmeriQuest and BancMortgage Financial Group.
Some of the biggest names in the mortgage industry -- Bank of America, Countrywide, Wells Fargo Home Mortgage and Washington Mutual -- say they continue to underwrite mortgages for Georgians with good credit histories. Spokespersons for the lenders say they are keeping an eye on the situation.
Lenders are awaiting word from the nation's two biggest buyers of mortgages, Fannie Mae and Freddie Mac. A Freddie Mac spokesman says the corporation continues to buy mortgages from Georgia. Fannie Mae has not responded to requests for comment.
Richard Raymer, general counsel for the Georgia Mortgage Bankers Association, says he expects Fannie Mae and Freddie Mac to continue buying mortgages, meaning people with good credit will have no trouble getting home loans.
Lenders are operating under that assumption. "I'm going to keep doing my business until somebody tells me I can't," says Brian Peart, president of Nexus Financial Group in Atlanta. It is possible, he says, that Fannie Mae and Freddie Mac will stop buying mortgages from Georgia.
Such an action by Fannie Mae and Freddie Mac could halt mortgage lending in Georgia, and Peart believes someone would step in to relieve the crisis: "I can't imagine they're going to let everyone in Georgia suffer with no loans for purchasing or refinancing."
How mortgages are bought and sold
To understand what Standard & Poor's did, you have to know how mortgages are bought and sold and how Georgia's law affects investors. When you get a mortgage, the lender can either keep the loan on its books or sell the loan, usually to Fannie Mae or Freddie Mac. Most conforming mortgages are sold. When the lender sells your mortgage, it gets cash to lend to the next guy, and then that loan is sold, and so on.
When Fannie Mae and Freddie Mac buy home loans, they bundle millions of dollars' worth of mortgages into mortgage-backed securities, which are similar to bonds. Mortgage-backed securities are sold to institutional investors such as pension funds. Like bonds, the securities are rated.
Here's what Standard & Poor's did: It said that it won't rate bundles of mortgages that include loans made under Georgia's fair-lending law. Standard & Poor's doesn't rate mortgage-backed securities bought and sold by Fannie Mae and Freddie Mac, but it does rate securities comprising subprime, stated-income, low-documentation and interest-only loans, as well as certain mortgages on investment properties and high loan-to-value mortgages. Standard & Poor's action will make it difficult or impossible for lenders to sell these mortgages on houses in Georgia. Lenders will have less money to lend to future borrowers, and that will drive up rates.
State Sen. Vincent Fort, a Democrat from Atlanta who worked for two years to pass an anti-predatory lending law, says he will believe that lenders have pulled out of Georgia when he sees documentation. News of an exodus of subprime lenders from the state, he says, "is part of an orchestrated campaign of lies that the predatory lenders began in earnest after the law passed last April."
Some of the companies who reportedly have stopped lending in Georgia "do bad, predatory loans," Fort says. "Is anyone who wants a good loan, are they going to be prevented from getting a loan? No!"
Why did Standard & Poor's take action? Because Georgia's law allows alleged victims of predatory lending to sue not only their lenders, but also the investors who buy mortgage-backed securities. A pension fund or other institutional investor could lose the value of all the Georgia loans in its mortgage-backed security, and also could be liable for punitive damages.
With each Georgia loan carrying the possibility of unlimited punitive damages, it is impossible to calculate the risk of having Georgia loans in a mortgage-backed security, says Frank Raiter, managing director of Standard & Poor's residential mortgage ratings group. So Standard & Poor's will rate only mortgage-backed securities that don't have loans covered by Georgia's anti-predatory lending law.
The Georgia law divides mortgages into categories: home loans, covered home loans and high-cost home loans. Most mortgages are classified under the law as regular home loans and are not considered predatory at all.
Covered loans have relatively high interest rates (right now, 8.25 percent or above) and are for people with a few problems in their credit histories. Lenders are wary of extending these types of loans for fear of being sued.
And lawsuit fears have stopped virtually all lenders from underwriting high-cost loans, which have very high interest rates and fees and are intended for borrowers who have histories of late payments and unpaid bills.
Georgia's legislature intended for lenders and investors to treat regular home loans differently from covered and high-cost home loans. But Raiter, of Standard & Poor's, says the risk is too great that someone will mistakenly classify a covered or high-cost loan as a regular home loan, and that an investor would be sued. So all loans governed under the Georgia Fair Lending Act effectively are barred from mortgage-backed securities rated by Standard & Poor's.
Some mortgages are not governed by the Georgia law: jumbo mortgages (loans in excess of $322,700), reverse mortgages, bridge loans that finance the construction of the borrower's primary home, agricultural loans and commercial loans. Standard & Poor's action does not affect those loans.
Long compares the Georgia law to a platypus. "What (legislators) came up with doesn't swim well, wobbles when it walks, quacks when it talks and overall is an ugly animal," he says.
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