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• W3125605656 abstract "By now everyone knows that reckless and even predatory mortgage lending provoked the financial meltdown. Editorial, The New York Times, October 19, 20081 I. INTRODUCTION In this Article we make two claims. First, we argue that the current subprime mortgage and credit crisis would have been avoided, or at least greatly mitigated, if existing securities laws had been properly applied to subprime mortgage brokers and originators. Second, we argue that under any of what we regard as three reasonable interpretations of the securities laws, many of the problematic mortgage brokers are actually under the SEC's jurisdiction.2 This tantalizing possibility does not appear to have occurred to anybody this crisis, at least to this point. Kafka would have loved this story: According to our current understanding of U.S. law, there is far better consumer protection for people who play the stock market than for people who are duped into buying a house an exotically structured subprime mortgage, even when the mortgage instrument is immediately packaged and sold as part of a security.3 We live on a peculiar legal landscape which homeowners have almost no recourse under consumer protection laws against people who peddled unsuitable mortgages to them, unless the funds generated by the mortgage financing happened to have been used by the homeowner to purchase securities rather than a house. The bizarre juxtaposition between the plethora of legal rights afforded participants the securities markets and the dearth of rights afforded participants the mortgage market became clear a lawsuit filed by the SEC on September 29, 2008 against a group of securities brokers southern California.4 These broker-dealers persuaded some of their customers to refinance their houses through a related mortgage company and to take the proceeds of the refinancing and use them to buy exotic securities known as variable universal life (VUL) policies,5 which consist of a combination of a life insurance policy and an investment equities. Consider one of the SEC's allegations their Complaint. The SEC alleged that Gabriel Paredes, the marketing director of World Group Financial and a branch manager at Ainsworth Mortgage, recommended to Lorenzo Pelayo that Pelayo refinance his home a negative amortization loan and use the proceeds to buy VUL securities.6 Pelayo is a 41-year-old truck driver a weak command of English, four children (ages four, five, seven, and nine), and a combined family income of $15,000.7 Mr. Pelayo made an upfront payment for the VUL securities of $9000, all of which came from the proceeds of the refinancing. The VUL required monthly premiums 2006 of $500, which over the course of the year equated to 40% of the Pelayo family's entire yearly household income. Pelayo's subprime mortgage contained a substantial prepayment penalty and the interest payments were variable rather than fixed, two facts that the SEC alleges were not properly disclosed.8 The SEC alleged that the subprime mortgage was an unsuitable way for Pelayo to purchase securities that themselves were unsuitable for him.9 The SEC's lawsuit is based on the assumption that the securities laws do not apply to these (or any other) mortgages. While mortgages are financial instruments for which the SEC does not claim jurisdiction, the SEC is taking the position that because the proceeds of the negative amortization mortgages were used to finance purchases of other financial instruments over which the SEC does have jurisdiction-the VUL securities-the entire transaction is covered by the securities laws, which ban fraudulent or misleading practices in connection with the purchase or sale of securities.10 If Mr. Pelayo had used the proceeds of his refinancing to buy food or other necessities, the SEC would never have become involved the case. It was an anomaly-the fact that that the proceeds of the subprime mortgage financing were used to buy securities rather than food, clothing, or shelter-that made the case of interest to the SEC. …" @default.
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• W3125605656 date "2009-03-22" @default.
• W3125605656 modified "2023-09-24" @default.
• W3125605656 title "Helping Law Catch Up to Markets: Applying Broker-Dealer Law to Subprime Mortgages" @default.
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