Wednesday, April 30, 2008

A week in the life of mortgage "reform"

Here's a mortgage crisis chronology for this week, as reported by the New York Times and Washington Post. Can you guess what these articles have in common?

On Sunday, Michelle Singletary's The Color of Money column discussed Treasury Secretary's Henry Paulson's recommendation to create a Mortgage Origination Commission that would promulgate standards for mortgage loan officers and would rate and report state efforts to license and regulate mortgage brokers. In her view, a new Commission isn't needed. Instead, she argues that what we need to do is send some of these people to jail. Rather than have a commission talk about their fraudulent acts, she suggests that we need to criminally prosecute loan officers who have engaged in fraudulent lending activities.

On Monday, the New York Times reported that the mortgage industry has stepped up its attack on proposed Federal Reserve regulations that are designed to regulate certain mortgage lending practices. These regulations would require lenders to disclose all fees (including broker's yield spread premiums), would require lenders to show that customers can actually afford the mortgage, would ban certain types of advertising, and would regulate other practices viewed as abusive. The mortgage community argues (of course) that tighter regulations will increase the cost of credit and ultimately will harm creditworthy borrowers. The Times reports that the industry's aggressive attack on the regulations and their flood of comments have been successful in convincing the Fed to narrow the proposed regulations.

Yesterday (Tuesday). An editorial in the Times criticized the government for waiting too long to respond to the foreclosure crisis and sharply criticizes the pro-mortgage industry aspects of the bill the House recently passed. It specifically notes that the bill relies too heavily on the voluntary participation of lenders, and stresses that lenders can choose whether to reduce the mortgage loan balances or whether to continue with a pending foreclosure. The editorial urges Congress, especially the Democratic leadership, to push forward with legislation that would let borrowers modify their mortgages in bankruptcy.

Today. An article in the Times reports that fewer than 1,800 homeowners have been helped by the Federal Housing Administration program that was designed to provide relief to homeowners who have fallen behind on their mortgage payments. Though FHA officials contend that more than 150,000 people have benefited from the program, the program has largely helped homeowners who are current on their mortgage payments (and who anticipated that they might have problems in the future), not the folks who were in default and at risk of losing their homes in foreclosure. Surprisingly, housing officials seemed surprised by the number of homeowners who sought to benefit from the program. It's surprising that they were surprised by the homeowner interest in the program, since over a million people have fallen behind on their mortgage payments.

Why so few homeowners are benefiting from the FHA program is anyone's guess. Perhaps it's the design of the program, which provides relief only to borrowers who have made 10 timely payments in the 12 months before they went into default. Maybe it's because the program hasn't been well publicized. Or, perhaps officials at the Department of Housing and Urban Development, which oversees the FHA, have been a tad distracted of late by the scandals involving the former-HUD chief (who resigned recently but is still being investigated for questionable business practices). One thing we don't have to guess is that this program is going to do little to help most struggling homeowners this year, unless the program is radically revamped.

So what do these news reports have in common? First, the mortgage industry seems unwilling to voluntarily reform itself. Second, any attempt to regulate the industry will be met with the claim that doing so will do no good and will only exacerbate the credit crisis. Third, no one in the government seems to want to take truly bold steps to do anything meaningful anytime soon, and everyone seems happy to engage in long discussions (in committees or on commissions) about the housing crisis. Fourth, the Fed and members of Congress appear unwilling to alienate the powerful financial services industry.

Of course, the week's not over yet. Things can only go up.

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