Subprime Fallout Continues - More Regulation Ahead

As those of you who have read our Blog before know, we are not fond of how a large segment of the mortgage industry has conducted itself in the last few years. Common sense went out the window in order for lenders to make huge profits under the guise of helping borrowers obtain more housing opportunities. Unfortunately, it doesn't take an economics degree to see where that got us. Making bad loans because you can does not mean you should. And, originators making them in order to pad their income is even worse.

Perhaps the saddest part of all is that, to date, we've seen very little of the industry actually doing anything to curb the abuses. In fact, we were dumbfounded recently after attending a seminar, where it was made crystal clear that subprime is alive and well with both the host company and many of the attendees stating that these types of loans will still be originated and funded.  And, it is going to affect the industry as a whole and make it impossible for "qualified borrowers" to obtain specialized financing to meet their needs. All you have to do is look at the jumbo loan market to understand what the unintended consequences of this mess can mean.

Fortunately, this time, we believe the damage being done from some within the industry is going to be stopped dead in its tracks. How? New lending regulations and enforcement. Will it work? Let's hope so, because if it doesn't the current problems are going to pale with what could happen in the future. Will qualified borrowers be hurt in the process of cleaning things up? Absolutely.

Let's take a look at what some states and the federal government are doing to deal with the situation:

• Alabama, Colorado, Florida, Illinois, Indiana, Kentucky, Minnesota, New Mexico and Wyoming have all either enacted new laws, strengthened existing laws or stepped up enforcement procedures with regards to mortgage lending practices. In fact, just today, Nevada announced that stated income/stated asset loans are no longer acceptable as of October 1, 2007.
• The FTC mailed well over 200 letters warning lenders about "potentially deceptive" mortgage advertisements they feel could be giving borrowers a false impression of the actual costs of home loans. You know the ones - “Borrow $200,000 for only $938/month” - payments that are based on the first month's ARM teaser rate.
• Legislation is being considered by Congress on a variety of issues ranging from increasing auditing requirements, current mortgage licensing procedures, and new enforcement penalties. There is even consideration of holding banks that package mortgage securities, and the investors who purchase them, legally responsible for fraud committed by lenders.

Will any of these steps correct the current situation? Probably not in and of themselves. But, the fact remains, an industry that won't police its own actions are destined to have them policed by others. Usually to the detriment of all involved.

Metro Mortgage Company is a full service federally regulated Mortgage Banker specializing in originating Conventional, Jumbo and FHA/VA loans in 20 States including Florida.

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