Among the most remarkable (I know, because I’ve already remarked upon it, and I’m not the only one) of the new rules on home mortgage lending finalized Monday by the Federal Reserve is the one that aims to:
Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.
Lenders need the government to tell them not to make mortgage loans to people who can’t pay them back? Actually, they probably won’t for the next 10 or 15 years. But there will come a time when the bulk of bankers, mortgage brokers, mortgage securitizers and mortgage investors will have no memory of the Housing Debacle of ’07 and ’08 (and ’09 and ’10?), and somebody will need to rein them if a rerun is to be prevented.
Will the Fed rule actually do that? It sounds both breathtakingly obvious and dangerously vague, although it does subsequently get into specifics:
A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a “pattern or practice.”
When I talked the other day to Louis Pizante, CEO of Mavent, “the mortgage industry’s foremost provider of automated regulatory compliance solutions,” and himself a former mortgage investment banker, he wondered if maybe the Fed wasn’t taking the wrong approach. “The regulators are encroaching more and more on the actual underwriting of the loans and they’re getting more and more subjective in their requirements,” he said–a recipe for confusion, legal wrangling, and poor compliance.
What Pizante would like to see instead are government rules on how mortgage brokers are paid. “To me it would seem that it would be much easier to regulate broker compensation,” he said. For example: “You’re not going to get a lump-sum fee, you’re going to get a percentage of the cash flows from that loan.”
There’s been an awful lot of talk over the past year about changing compensation both on Wall Street and in the mortgage business to better reflect the risks inherent in transactions that deliver a big up-front payday. But the standard retort is that any firm that tries to enforce such pay arrangements would quickly lose its best producers to competitors. Which, in Pizante’s view, is exactly why government needs to step in.
“That’s where regulation is supposed to come in,” he says. “You don’t want to stifle innovation, but you do want to insure that there’s a level playing field.”