The Federal Reserve, the quasi-governmental panel that regulates some banking practices, has finally come through with some rules and regulations for the mortgage-lending industry. This is the same fed that regulates how much banks pay to borrow from each other and the government.
Talk about locking the barn door. Thousands, if not hundreds of thousands, of families have lost, or will lose, their homes to foreclosure. Yes, part of it is their fault for not being realistic about their ability to pay back these loans.
But, and it is a huge but, the Fed should have seen this coming.
Under the proposal, unveiled last December, the rules would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value. The Fed board is supposed to vote on this next week.
In the heady real estate market that seems so long past but is really not much more than a couple of years ago, it was virtually impossible to be turned down for a loan, as long as the house was up to the local building codes.
The following could have happened, and, I'll bet, did happen more than once.
Lender: So you want a mortgage on the house you want to buy?
Borrower: Yes.
Lender: How much money do you have for a down-payment?
Borrower: None of your business.
Lender: How much do you make?
Borrower: None of your business.
Lender: OK, how much do you have in the bank? What other loans do you have outstanding? Have you put aside money for taxes and insurance?
Borrower: None of your business to all three.
Lender: Perfect. Here's the check. Congratulations.
I hate to say "I told you so" but I, along with many colleagues, was doing stories on this a couple of years ago. When nearly half the houses sold in 2006 were sold with little or no down payment, when lenders were offering loans for a full 25 percent more than the home's value, when you could choose to pay little or even nothing each month on your loan, people like consulting economist Nick Perna were sounding alarm bells. Again, if it seems to good to be true, it probably is. Boy, was it ever for so many homeowners.
You can read what I wrote about this in March of 2007.
http://mindoflen.blogspot.com/2007/03/ides-of-march-for-mortgages.html
That one has a link to an even earlier story about the danger. The only problem with the March 2007 story was the opinion that the housing mess was a part of a normal market decline. I guess I just didn't know the extent of the mess.
Now, if guys like Nick Perna and I can see this coming a couple of years ago, where was the Fed in March of 2007?
Well, I guess too little too late is better than nothing at all.
Until next time...
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The housing market is a mess indeed. A combination of ridiculous lending and borrowing is undoubtedly going to lead to a collaspe in the end. The problem is everyone wants their own home and will take out massive loans or mortgages to achieve this. But if they don't work out what they can actually afford to pay and lenders don't care its obviously going to end in total misery...for the homeowners anyway.
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