A multi-vitamin where a flu shot is needed

Posted by: Chris Palmeri on July 6, 2007

The nation’s leading financial regulators, including the Federal Reserve and the Federal Deposit Insurance Corp, released their long-debated guidance on sub-prime mortgage lending on June 28. You can read the full document here: http://www.federalreserve.gov/boarddocs/press/bcreg/20070629/attachment.pdf

Talk about closing the barn door after the animals have gotten loose! The statement merely recommends that lending institutions limit the use of so-called no-documentation or “liar loans” to situations where there are “mitigating” circumstances. These are loans where the home owner gets to borrow hundreds of thousands of dollars without actually proving his income is what he says it is. The statement calls on lenders to provide consumers full disclosure about how their rates will climb with adjustable loans and to base such loans on the borrower’s ability to pay at the maximum, fully-adjusted rate.

Sen. Christopher Dodd, head of the Senate banking committee, said the statement falls far short of what he thinks the regulators’ restrictions should be. He wants regulators to limit prepayment penalties, for example.

Other critics of the settlement included the National Community Reinvestment Coalition which called the statement “like giving a child a multi-vitamin pill when a flu shot would have been the best protection.” The non-profit borrower rights group says the new lending rules need to be extended to all mortgage lenders, not just federally chartered banks. The Senate is considering legislation that would do that, as well as extend liability to the appraisers and brokers the lenders do business with, according to the trade publication Inside Mortgage Finance.

Groups such as the Mortgage Bankers Association have argued that tighter regulation will limit some buyers’ ability to own home. They claim the changes will reduce the liquidity in the market by discouraging investors from buying loans because of the additional liability they may have. Meanwhile, the mortgage industry continues to experience record high defaults in the risky loans it made even last year. As Bank of America analyst Robert Lacoursiere titled a recent report: “Just the tip of the iceberg. Mortgage Credit Deterioration.”

Reader Comments

Gerri Detweiler

July 19, 2007 9:46 AM

Lack of transparency and the ability for consumers to shop accurately for subprime and alt-a loans have also been reasons consumers have been placed in inappropriate loans. We recently analyzed our database of lender subprime rates going back four years and found in the large majority of cases (even at the low subprime level) the difference between the best 30-year fixed subprime loan and the best 2-year ARM has consistently been only about .5% -- hardly justifying the risk in the ARMs that have been so prevalent.

But even the most conscientious mortgage broker would likely have to spend hours search pages and pages of rate sheets to come up with accurate pricing among all the subprime lenders to find the best in both categories, unless they just happen to be pricing with those lenders that day.

Professor Howell Jackson has testified before Congress that the Federal Reserve needs to publish par rates...(which we make available directly to consumers for free) but consumers still remain in the dark for the most part -- relying on a loan officer's word for their most important and expensive financial transaction.

Some LO's are doing a very good job, but other's aren't. Last week I spoke with a mortgage broker who was trying to help a consumer refinance a 2-year subprime ARM that was about to adjust. The loan carried a 3-year pre-payment penalty. You are right that it may be too late for that consumer. But for anyone trying to get a loan today, that kind of abuse has to be stopped.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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