The Fed and Mortgage Regulation

I was reading the Housing Wire Blog and today's post mentioned remarks made by Federal Reserve Bank of Minneapolis president Gary Stern. In them he is quoted (by a Reuters report) as as saying that "U.S. regulators should use caution in reforming mortgage lending rules that have benefited many Americans." he went on to mention that, according to the report, "many people were able to become homeowners because of innovative financing products like adjustable-rate mortgages, so 'you don't want to throw the baby out with the bath water' by over-regulating them."

Well, isn't that just silly. Of course we all liked the so-called exotic mortgage products that were offered. Backed by Wall Street investors, these products offered a wider range of financing solutions than conventional and government products. See, that is not the problem with this sub-prime mess. I once wrote an article for Hamptons.com called "No Respect For The Loan Officer." In it I mentioned that a monkey with a calculator could become a Loan Officer because there are no tests or regulations covering individuals that sell loans. True then, true now.

See, for a seasoned professional with a little bit of training, these exotic products offered a full suite of products to sell to the public. The problem is that the mortgage Loan Officers THEMSELVES were not licensed or regulated. Offices in certain states had to be licensed but the individuals did not. In this case, anyone, including some very selfish, crooked people sold exotic loans without proper disclosures or deceitful practices without fear of repercussions.

Mr. Stern is not seeing the forest for the trees here. I know that he was addressing the possibility of regulating mortgage LENDING but still, no one these days is talking about regulating mortgage LENDERS.

As a Loan Officer myself for over 6 years, my biggest problem was when a customer would go with some fly-by-night mortgage broker who promised the world to them while I was giving them a dose of reality. A typical scenario was that I offered a customer a fixed rate loan, perhaps with points. The competition was offering no points and a lower rate but was not being upfront about where that rate would go in the near future and how a reverse in the housing market might affect his investment and loan. Too bad for my client because the more I talked the more I seemed to be offering a worse deal. Short of calling my competitors a downright liar, there was nothing I could do.

People, it seems, will believe what they want to believe. Regulation of individual Loan Officers would severely limit the number of shysters out there. Looking at lawyers, stock brokers, doctors and many other licenses professionals, we know that it will not eliminate the bad stuff all together, but man, it should be a little bit harder to go sell mortgages than the public then exhibiting a pulse.

I disagree with Mr. Stern. Regulation is needed in the mortgage industry and long overdue.