INDIANAPOLIS — An intensified effort at promoting financial literacy among prospective homebuyers might be more effective than strict regulations to prevent another foreclosure crisis, a Federal Reserve official said Tuesday.
Chicago Federal Reserve Bank President Charles Evans said government rules to eliminate "nonstandard" mortgage products would prevent unqualified borrowers from obtaining risky loans. However, elimination of such products might leave qualified borrowers with fewer options, said Evans.
"Specialized (high risk) products may actually be appropriate for certain people, so such a policy would have some real costs," Evans said.
The collapse of subprime mortgages and the broader housing market has contributed to the worst economic slowdown in the U.S. since the Great Depression.
Debate is now focused on how best to prevent a future crisis, even as leaders struggle to recoup massive job losses from the recent meltdown.
The Chicago Fed chief suggested that aggressive education efforts might be more effective in achieving a sustainable housing market rather than prohibition of high-risk mortgages.
"Such an approach might keep those who shouldn't be in exotic mortgages from getting them while leaving such mortgages available to the small group of people for whom they are appropriate," said Evans in prepared remarks to the Indianapolis Neighborhood Housing Partnership.
The INHP is a nonprofit program aimed at preventing foreclosures.
Evans cited the INHP as a model for preparing potential borrowers for homeownership.
Participants enroll in classes and attend individual counseling sessions on topics such as money management, credit score maintenance, and the process of buying a home.
"Despite entering the mortgage process in worse financial shape relative to other borrowers, INHP clients had a lower default rate over a 12-month period," said Evans.
The Chicago Fed president didn't discuss specifics of monetary policy during his speech.
He said he sees "some evidence of home price stabilization," and "some encouraging signs of general economic recovery."
However, "we are certainly not out of the woods," Evans said.
Evans isn't currently a voting member of the interest rate-setting Federal Open Market Committee.
