The past 4 years have shown us some of the worst effects of over extending family budgets and what the result of government intrusion into private business can be. It shows us that Wall Street executives whose compensation plan is based on short term gains can often roll out bad loan programs that will have dire consequences years later.
While underestimating the extent of what would come, many of us in the mortgage industry recognized that some type of housing crisis was coming. The numbers just didn’t add up, every year more and more of the household budget was being spent on housing, and the lending requirements got easier and easier. Some of those lending requirements were good- others detrimental. The result of the industry association’s efforts was usually answered in the form of new disclosures and requirements for education to mortgage professionals. While these efforts would have some positive effects, they could in no wise offset the growing trend of spending too much on a home.
In the late 90’s and early 2000’s A number of powerful government officials and legislatures started to pressure Wall Street banks to make loans to lower income families. In response to the pressure wall street banks as well as Freddie Mac and Fannie Mae made adjustments to their executive compensation plans to realize bonuses tied to the overall dollar size of the loans being serviced rather than on profits to the company. Other compensation adjustments were made as well. By the time the changes were made several homeowners lost their homes, investors took losses, banks closed their doors and politicians blamed everyone else. The remaining banks have tried- with some success- to blame the individual loan officers and mortgage brokers for the crisis. However, mortgage fraud was not the main reason for the housing crisis, but there were problems that needed to be addressed. The main culprit however was the loan products whose guidelines allowed borrowers to borrow more than they could afford. These products- resulting from pressure from Washington combined with Wall Street greed- is what resulted in the massive foreclosure that came just a few years later.
Since then smoke and haze has surrounded the industry and many state and federal level officials started to litigate against lenders who were foreclosing on its borrowers who did not pay their mortgage. Any technical mistakes made by any bank attacked fiercely by politicians looking to score PR points. The federal government made settlements of historic proportion with the most prominent banks in the country. Regardless of whether you agree or not on the government’s handling of the banking industry one indisputable fact remains- Investors are less likely now than ever to invest in private mortgage financing out of fear of government lawsuits and prosecution. As a result very few private mortgage loans are left, leaving consumers to shop between conventional loans backed by Fannie and Freddie- both established by government, or government loans backed by FHA, VA and USDA.
Now the CFBP wants to test a new system for disclosure with mortgage bankers to help address this problem as well the confusion that has come from mountains of technical mortgage disclosures. Included in the proposal would be to provide a safe harbor for banks that follow certain rules with certain loan types. The other is to allow banks to issue their own disclosures rather than the required disclosures currently required by federal law. Many argue the current disclosures are so confusing that even industry professionals have a hard time making sense of them.
Allowing banks to provide its own disclosures – with requirements of course- could aid in bringing more mortgage products to the table once again. Further- a safe harbor rule would go a long way towards re-establishing a healthy mortgage industry where investors feel safe to once again lend outside of the government established mortgage products. This influx of mortgage money could help the housing market rebound as more borrowers would qualify to buy homes. Jobs in real estate and construction would be generated and the economy would benefit. I am supportive of these changes If these rules are made and implemented in a common sense way.
I would however love to see one more set of rules enacted to ensure a repeat of the past won’t happen again. First- No elected official or government agency should be able to pressure lending institutions with regard to the loan types that is offered other than through public mediums. The backroom deals between politicians and bankers need to end. The market should dictate what products are available, not a special interest lobby or a powerful politician. Second- all bonuses for mortgage bankers and servicers should be based on the long term profitability of the portfolio- with bonuses being amortized and adjusted for the coming 5 years. We are far less likely to see a repeat of this crisis if the personal financial incentives for making bad loans are eliminated.