US Government Finally Getting Serious About Mortgage Reforms

Tyler Cowen thinks that the

Fed should not have a consumer-protection function. I’m largely sympathetic

– it’s not as though there’s any shortage of other regulators in Washington

who could pick up the slack – but in reality the Fed does more for consumers

than Cowen gives it credit for. Look at this

Ned Gramlich speech, for instance: the Fed was always at the forefront of

efforts to ensure that (a) banks lent to blacks as well as whites, and that

(b) banks lent to blacks at the same risk-adjusted interest rates at which they

lent to whites. In this era of abundant credit, people sometimes forget about

the redlining problem, but it was a big one, and we can thank the Fed, in part,

for helping to solve it.

All that said, Edmund Andrews’s front-page NYT article today, "Fed

Shrugged as Subprime Crisis Spread," does compellingly describe a central

bank which at best was committed to laissez-faire policies, or which at worst

was trying to shore up the post-dot-com-crash economy by deliberately allowing

the property bubble to inflate.

So I’m glad that the Fed has finally

gotten around to responding, with policies designed, in the words

of the AP’s Jeannine Aversa, to "give people taking out home mortgages

new protections against shady lending practices".

Most prepayment penalties would be banned on subprime loans: I like that. Underwriting

standards would be tightened up on no-doc loans: I don’t quite see the point

of that one, but it certainly can’t do much harm. And lenders would have to

include tax and insurance payments along with mortgage repayments when making

their underwriting decisions: well, duh. (Update:

Tanta

reckons this is an escrow thing, not an underwriting thing. Which, as she rightly

points out, could be more problematic.)

The big change is that lenders would have to underwrite subprime loans based

on the borrower’s ability to repay over the duration of the mortgage, rather

than just for the initial teaser period. This could well affect younger borrowers

with a very good chance of seeing their income rise significantly by the time

the reset comes, although without seeing the details of the proposal it’s hard

to know for sure. It will certainly serve to dampen the amount of property speculation

going on among subprime borrowers, which must be a good thing.

Meanwhile, it’s also worth noting that Hank

mortgages. It seems that the Federal government is – finally –

getting serious about addressing problems in the mortgage industry. It’s too

late, of course. But better late than never, I suppose.