When consumer groups warned of predatory lending, the financial services industry talked about "innovation." The Consumer Federations Travis Plunkett says, "a lot of what the financial industry called innovation actually harmed consumers." Take for example, one of the most toxic products, the payment option adjustable rate mortgage.
At the height of the housing boom, in high cost markets like California, these mortgages made up nearly a third of new loans. I recall speaking with a financial planner about these loans when they first became popular. She said they didn't make sense to her and she wouldn't recommend them for most borrowers. Problem was their key feature, paying only interest, made it difficult to build wealth without home prices continuing to go up. And in the event prices were flat, a borrower could end up owing more than they borrowed in the first place.
The loans also had built in adjustments that could increase payments into the loan. While they may have made sense for a small population of borrowers, they were mass marketed. For a while, they were highly profitable for the financial institutions and banks, which both sold and bought them. When home prices fell, borrowers defaulted on those loans in record numbers. Plunkett says a financial product safety commission would bring a return to traditional lending values.
Existing bank regulators could have played this role, and reined in these lending practices, but they didn't. So what will make a new regulator better than the old? Advocates say it will be crucial that the new regulator is independent from the institutions it regulates.
Comments
Steve,
Often the borrower gets hit with so much information at the last minute; it can be hard to process. When the moving truck is on the way, it can be costly and difficult to walk away from a bad deal. First American CoreLogic Loan Performance has good data on loan defaults. You're right; it's not readily accessible to borrowers.
I do'nt know where the statistics on 25%-30% comes from and the examples and explainations to defaults has largely been made public. Certainly a financial planner would have the foresight in seeing the downside to these loans by observation. A first time homebuyer would not, especially being pushed into a 45 day escrow and a letter stating they quailify to buy a home. They did'nt know lending specifics, but they did assume laws protected them from any wrong doing, just the same as you going to the doctors office or auto mechanic. Your not educated to know the problem, but you do know your protected by laws from any wrong doing. Therefore you trust.
Title 18, Part 1 Crimes, Chap 47 sec. 1005, 1006, 1014 Federal laws basicly explains any mortgagee who takes part in any fraud faces up to 1 million in fines or 30 years in jail.
We do have laws in place but 1 mil is nothing when your making billions and have a good lawyer.
Experienced realtors pushing the quick close, brokers with there cunning doc. formation, and employed lenders all had some knowledge to this. But knew it would take a long drawn out legal battle to prove. " So what will make a new regulator better than the old" EXACTLY! They balance a crimes punishment vrs the profit and odds of getting caught.
It's even more easy to toy with and ignore the laws when you push the wrong doing on the home owner for signing the documents.
It is still my opinion that the government and the media are placing too much blame on the mortgage product and too liitle blame on the mortgagee and other economic factors. If the default rate on these adjustable rate and interest only mortgages is 25%-30%, that means that 70%-75% of them are not in default. How can we argue that the product's bad if three-fourths of the people that have them are apparently OK with it?
I've not seen anyone really dissect the reason loans have gone into default. Did the people who refinaced existing loans take cash out to buy other expensive toys and then discover they were overextended? I've also not seen much blame on all this placed upon the oil companies. Didn't the economic downturn coincide with the spike in gas prices which caused both a direct and indirect hit to people's disposable income? To simply lay it all on an "innovative" mortgage product is in my opinion just picking the low hanging fruit.
What always worries me is if they create a new financial product safety commission because the existing bank regulators weren't effective, what will happen to those regulators? Will that department be disbanded or will they stick around collecting salaries too?