The Fed Jumps In
The Federal Reserve has just proposed new consumer protections for home mortgages and home equity loans. Perhaps the timing has something to do with the Fed's objection to the creation of a new Consumer Financial Protection Agency (CFPA).
The Fed's proposed regulations are generally about disclosures. It believes that by giving consumers simple and clear information on the various pluses and minuses of various mortgage products, the consumer can then make intelligent decisions. The CFPA, to be contrasted, would get much more granular -- devising a plain vanilla mortgage product and encouraging its use by all. If lenders and consumers sought to do something different -- i.e., not plain vanilla -- there would be CFPA hurdles to be leapt over.
In short, the Fed's proposals are much less paternalistic than what CFPA has contemplated.
As an attorney who has closed several thousand residential mortgage transactions, I worry about disclosures having the desired effect. As a practical matter, they are often ignored given that most home buyers (and borrowers) are just in a hurry to get the mortgage they need/want and therefore give short shrift to the paperwork. So, I worry that improved disclosures will do they job for which they are intended.
But I also worry about the government stepping in and creating a whole new slew of paperwork -- vanilla lending products with waivers (for non-vanilla). Although the intent is a good one, the execution and reality often causes confusion, delay and cost, the best example of which is the existing HUD form which all parties must sign at closing.
I feel that our energies (and money) should be directed at making U.S. consumers more financially savvy -- so that all these protections not be necessary. Understanding the principles of mortgage borrowing is not rocket science. People can get it if they want to. We could create, for example, a 10-point checklist that any mortgage borrower can access -- which gives the relevant questions to ask a lender when contemplating a mortgage. We could provide a 30-minute video available for free on line to any consumer who wants to understand mortgages. Basic, simple stuff that will cost the government nothing and will be there for consumers who want advice. Should we as a country be creating a whole new slew of regulations and documents and protocols and procedures to protect people from themselves? I propose instead that we create clear and understandable educating resources that are available to all who are willing to invest say one hour in learning what kind of mortgage product works best for them.
Jim Randel is the author of The Skinny on the Housing Crisis which last month was awarded the First Prize in a book competition sponsored by an organization of 600 journalists who following real estate and finance.
Follow Jim Randel on Twitter: www.twitter.com/jimrandel
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
Just enforce the laws that are on the books. RICO
Put everyone in jail who sold more than 3 of the investment vechiles that had no value.
It is that simple !
Selling more than 3 show you are running a CRIMINAL ENTERPRIZE !
Actually I think the relevant portion of RICO is the part where you fine the person engaging in the activity 3 times the profits earned or damages (whichever is greater).
What I would like to see is making the companies and individuals who peddled liars loans financially responsible to the people they sold the loans to. Betcha the bankruptcies would keep it from happening again!
I'm all for education.......let's start with the law enforcement agencies (city, county & state) who, despite compelling evidence of 'flipping fraud' in Florida (over $10 billion in suspicious deals this decade) "do not have the resources or manpower to go after white collar crime" (their response) Maybe we could also have a class to teach mortage brokers & bankers that accepting fees to approve bad loans is a CRIME. And let's not forget a few lessons for property appraisers and real estate agents who found a very lucrative partnership in falsely raising values and buying & reselling the same properties over & over, collecting commissions and fees on each inflated transaction. Actually, if we could teach them all some ethics, WE wouldn't need to be so smart.
"Should we as a country be creating a whole new slew of regulations and documents and protocols and procedures to protect people from themselves?"
This says it all. You are framing the dicsussion so as to blame the victims. This is a classic, false argument against regulation.
Regulation protects people, not from themselves, but from powerful institutions whose only purpose is to exploit them for the benefit of (already rich) shareholders.
Why is it that the lenders cannot work with someone who has been given thirty years to pay something off? And why would a mortgage payment double all of the sudden? This is not the fault of the homeowners--all of us want and like to have our own place to call home. The problem is, if you have to finance anything you buy 30 years into the future, it's too much money. Houses simply shouldn't cost that much, but it's been a reliable way to make money. And since money equals survival in our economy, you can't blame people for making as much as they can. In fact, it seems like the banks have been overly eager to kick people into foreclosure, when it would make sense to work with whomever bought the house. I don't really see an end to this phenomenon until we all get serious about the fact that housing is a very basic need that should be guaranteed to everyone. Give anyone thirty years and just a wee bit of flexibility and we could all own homes. But the banks have not been willing to be flexible, unfortunately. Does anyone think it makes sense to create an unusually high population of homeless people in our consumer driven economy? There's more going on here than just silly greedy homebuyers who don't know anything about mortgages.
And yes, I too wish our education system focused a little more on finances.
"And why would a mortgage payment double all of the sudden?"
Because it said that it would in the original contract. You can make all kinds of bad deals and there is nothing unlawful about that. Sorry... try again.
I was 23 years old when I bought my first house. It was 2002 and these exotic mortgages were available, but I thought that fixed rate was the best solution. I definately did not want my mortgage payment to fluctuate. I bought a house I knew I could afford. I chose a lender that was known to me. These things are all common sense. I spent a few hours researching mortgage terms and such before I applied for my loan. I am still in that house and my payment has gone up 10 dollars in 7 years, I am current and have improved my fico score.
The fact is that at least half or more of all people have a problem seeing things for what they are. These people live in a land of wishful thinking and believe in whatever reality makes them feel good. They want to believe they can afford the mcmansion, so they allow themselves to be fooled by the mortgage broker. They want to believe their credit card debt is better off wrapped up in a new mortgage
so they rationalize until they come up with a good explanation. I've seen this over and over again with members of my extended family. It's rampant. The ability to see things through a clear lens is not something that can be taught readily to the vast majority of people. A checklist is not going to change this.
Finally someone who did it right...
My home loan was a 5 year ARM. Most of the loan was paid off after five years at a low interest rate and when the interest rate jumped up, I refinanced to something basically equivalent to the terms of the first five years. After seven years the loan was paid off. In total the ARM saved me tens of thousands of dollars interest payment. It was the right product FOR ME. I knew that it would be the right product because I did the math beforehand.
The problem is that most people do not know ho to calculate these things properly. They make uneducated guesses or rely on the assurances of someone that they will be doing fine... and that's just not the right way to deal with large amounts of money.
Hi Jim. Amazing isn't it? My child spends 12 years in school and they can't teach him anything about managing a household checkbook, yet alone credit card borrowing and mortgage debt. Instead we get an astro turf football field and trips to D.C. for my gigantic property taxes. What a system.
I hope your kid enjoys playing high school football... soon enough he/she will realize that learning some math would have been more useful.
You must be logged in to comment. Log in or connect with
