A multi-vitamin where a flu shot is needed

The nation’s leading financial regulators, including the Federal Reserve and the Federal Deposit Insurance Corp, released their long-debated guidance on sub-prime mortgage lending on June 28. You can read the full document here: http://www.federalreserve.gov/boarddocs/press/bcreg/20070629/attachment.pdf

Talk about closing the barn door after the animals have gotten loose! The statement merely recommends that lending institutions limit the use of so-called no-documentation or “liar loans” to situations where there are “mitigating” circumstances. These are loans where the home owner gets to borrow hundreds of thousands of dollars without actually proving his income is what he says it is. The statement calls on lenders to provide consumers full disclosure about how their rates will climb with adjustable loans and to base such loans on the borrower’s ability to pay at the maximum, fully-adjusted rate.

Sen. Christopher Dodd, head of the Senate banking committee, said the statement falls far short of what he thinks the regulators’ restrictions should be. He wants regulators to limit prepayment penalties, for example.

Other critics of the settlement included the National Community Reinvestment Coalition which called the statement “like giving a child a multi-vitamin pill when a flu shot would have been the best protection.” The non-profit borrower rights group says the new lending rules need to be extended to all mortgage lenders, not just federally chartered banks. The Senate is considering legislation that would do that, as well as extend liability to the appraisers and brokers the lenders do business with, according to the trade publication Inside Mortgage Finance.

Groups such as the Mortgage Bankers Association have argued that tighter regulation will limit some buyers’ ability to own home. They claim the changes will reduce the liquidity in the market by discouraging investors from buying loans because of the additional liability they may have. Meanwhile, the mortgage industry continues to experience record high defaults in the risky loans it made even last year. As Bank of America analyst Robert Lacoursiere titled a recent report: “Just the tip of the iceberg. Mortgage Credit Deterioration.”