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Rush to Legislate Could Lead to ‘Unintended Consequences’

By Brad Finkelstein

SAN FRANCISCO--If there was one point that a state legislator and an industry representative agreed on is that any legislative solutions being crafted have to avoid unintended consequences during a panel on state and federal regulation at the Mortgage Bankers Association annual convention here.

California State Sen. Michael Machado said there is a need to update statutes but they need not to be so capricious so that it would hurt the marketplace. It is a balancing act of how to meet the desires of those who live in their districts with the responsibility of taking actions that do not exacerbate the problem, he said.

He pointed to the situation in New York, where Fannie Mae and Freddie Mac said they would not buy certain loans in the state after a new law recently went into effect. Another situation Sen. Machado said he was trying to avoid is what went on in North Carolina, where the market shut down until its predatory lending law was revised.

The intent is to have a level playing field to avoid what Sen. Machado called "regulatory arbitrage," where the entity tries to play off state vs. federal regulation.

Jack Konyk, senior vice president at National City Corp., said, "Everybody is trying to find a fair solution to a complex problem." The problem, he said, is what exactly constitutes a fair approach.

He then gave the example of an iceberg where it is easy to see and react to the 5% above the water, but it takes patience and perseverance to see the 95% below the water.

It is easy, Mr. Konyk said, to call for a moratorium on foreclosures. But for loan servicers, they are still responsible for advancing principal and interest payments to the investor whether they are made or not. So a servicer would not see a moratorium as a fair response to the problem. Mr. Konyk called for avoiding "hastily contrived solutions" like those the lending side has been dealing with for many years already.

Generally speaking, regulators and legislators are not trying to put mortgage companies out of business. But they need to know the industry’s position in order to get that view of the iceberg under the water, he said.