Criticism from industry groups that the Federal Reserve Board's proposed mortgage rules will make loans more expensive for consumers may be unintentionally ironic, since most subprime borrowers could not afford their mortgages when they got them, and they certainly cannot now.
Moreover, the resulting financial mess is proving very expensive.
This move by the Fed, which has long regulated mortgage lending by banks, is overdue. Since 2004 brokers have played a key role in stimulating the subprime mortgage market, expanding it from less than 5% of the overall mortgage market before 2004 to roughly 15% today. This run-up was a direct response to demand from investors (who purchase mortgages among other investment tools) for higher-yielding products.
In the past two decades mortgage brokers, rather than conventional banks, have provided almost 50% of all residential mortgage lending. Nevertheless, brokers are not regulated the way banks are, and in some states they are not even required to be licensed. In general, they are less well trained and less experienced than bankers.
Moreover, they are brokers. In other words, they do not have to eat their own cooking. They take a fee for brokering a loan, which is passed to the lender, and that's the end of the relationship. In this way, they are insulated from issues that might arise later because of judgment errors in controls and underwriting. In banking, such problems with "safety and soundness" can result in enormous fines, more stringent capital requirements, and revocation of licenses.
Better regulation might well add to the cost of mortgages, but it would have limited the subprime growth.
Moreover, the Fed's proposal gets right to the heart of numerous unethical practices that helped create the subprime debacle. These include approving loans without verifying income, disguising broker fees, and using misleading advertising. Can any ethical mortgage lender, banker or broker, oppose the elimination of such practices?
The idea that we should regulate banks that make mortgages but should not regulate mortgage brokers makes no sense. It is tantamount to gun control for half the populace — the half that is least likely to abuse the privilege of ownership.
Economic aid and interest rate cuts may help this time around, but they are not solutions.
Some legitimate borrowers may feel the pain of higher costs as a result of effective regulation of the entire mortgage industry. That may be the price of avoiding another subprime crisis.
