Wednesday, December 19, 2007

The Effects Of The Fed's New Plan To Regulate The Mortgage Industry

Yesterday the Fed announced their grandiose plan to regulate the mortgage industry to cure it of its downward spiral. Unfortunately their plan isn’t going to do much at all to correct the problem. Their reforms are mainly targeted toward subprime loans which, for the most part, are no longer existent. The banks who are still in the industry have, for the most part, already adopted the points now being made by the Fed.

So what’s the point of trying to fix an industry that has already taken steps to fix itself? Many lenders made stupid lending decisions and now those lenders are out of business. That is how things should work, right? The market has a tendency to work itself out if left to its own devices.

While it is possible that the Fed is trying to prevent this type of thing from happening again, the more likely scenario is that they are trying to get some nice public relations from their efforts to show they care. But the Fed is a little late to the party.

The following are measures the Fed hopes to install as part of future mortgage regulation, taken from their press release:
  • Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan.
  • Creditors would be required to verify the income and assets they rely upon in making a loan.
The first thought that should come to any investor's head is “Why would anyone even think about loaning someone money without considering how that person is going to pay it back?” Unless the borrower is putting a large amount down, that would be stupid. Hope none of you invested in these lenders.

That being said, investors who are concerned about these regulations shouldn’t be overly worried; the effects of these measures ultimately should have little to no effect on investors.

First off, these regulations appear to be for primary residences only; secondly, they are targeting higher risk--subprime--loans. Since the reality is no one can really get a subprime loan right now anyway, let alone a subprime investment loan, this measure will not do much. Keep in mind that these are merely suggestions by the Fed, meant to start discussions which will eventually lead to legislation, so the end result could be something completely different. At this point in time, though, the impact upon investors should be fairly minimal.

The biggest impact of this potential regulation is going to be on mortgage brokers, who will probably have to disclose everything under the sun now. Knowing how much their mortgage broker is truly making should be good news for borrowers, though. For more information on these potential regulations, read the press release issued by the Fed.
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