Monday, December 17, 2007

Too Little, Too Late

According to a CNN Money article, the Fed is expected to propose rules to crack down on mortgage lending tomorrow. Some examples of the rules being considered are (emphasis mine):

  • barring lenders from penalizing subprime borrowers - those with spotty credit or low incomes - who pay their loans off early.
  • forcing lenders to make sure that borrowers, especially subprime borrowers, set aside money to pay for taxes and insurance.
  • restricting loans that do not require proof of a borrower's income.
  • examining lenders' failure, in some cases, to consider a borrower's ability to repay a home loan.
  • improving financial disclosure so people better understand the terms and conditions of their mortgages and get this information when it is most useful.
  • curtailing abuses in mortgage advertising.
All of these were obviously needed years ago, especially the point in bold. Probably most stated-income loans made in the past couple years should have never been originated. I say 'most' because these loans are legitimate for some borrowers, e.g. the self-employed.

It is beyond me why the Fed did not address this practice until now. How could they not know these loans were being mis-used, when it's their job to regulate the financial system?

Not only are these rules too little, too late - the market is currently addressing some of them. To ask a rhetorical question, how many lenders are currently originating sub-prime or stated-income loans?

While these rules are necessary, they will do nothing to help the current mortgage-induced liquidity crisis.

Fed to crack down on shady lenders
WASHINGTON (AP), 12/15/2007 12:08 PM ET

1 comment:

StLCardsFan said...

Improving financial disclosure will do nothing. For the same reason people don't read the prospectuses of the mutual funds in their 401(k) plan (where they are getting screwed on adviser fees). If "how the loan works" can't be put into a colorful pamphlet of two pages or less, or turned into a funny sitcom, then borrowers will never understand any product except for fixed mortgages.
Also, missing from this list is requiring mortgage originators (brokers) and real estate agents to be fiduciaries. Where misrepresentation carries serious civil and criminal penalties. Yes yes, I know it is buyer beware, but until we require American adults to go to financial school (just like traffic school for tickets) and we require high school graduates to take a course in something more than balancing a check book, we will never really address the problem of morons signing up for mortgage products they don't understand.
I know we shouldn't be holding the hand of adults to help them with their personal decisions, but for possibly the first time in modern U.S. history I am suffering from the cumulative effect of all these idiots slowly figuring out they can't afford their homes anymore.
Now, I need to call my local banker to find out when the next auction is.....