Should the federal government mandate a six-month moratorium on all foreclosures around the country in order to give affected homeowners a chance to “work it out?” Or are tighter lending standards self-imposed by lenders a more appropriate response to the subprime mortgage crisis? What about licensing the mortgage brokerage industry at the national level? And what about regulation of mortgage-backed securities sold on Wall Street that helped fuel the excessive lending spree of the past few years?
From presidential candidates down to state legislators and city officials, a myriad of potential solutions to these and many other questions are being proposed in an effort to stem the rising tide of foreclosures in this country. As some of these proposals become public policy, they could have a significant impact on the opportunities available to real estate investors and buyers interested in foreclosures.
It’s a Done Deal
“The question is no longer should government get involved; that ship has sailed,” said Peter Miller, a nationally syndicated columnist covering the mortgage industry. “Government is involved. The only question is where government involvement is heading.”
The answer to that question seems to be consumer protection, a catch-phrase that brings politicians out in droves.
“It’s always time (for politicians) to get involved because we have to vote for them. That’s the opera,” said Richard Hastings, an analyst with Bernard Sands LLC based in
With the presidential election season already started, many of the candidates have already made begun posturing on an issue that promises to be a hot potato on the campaign trail.
“The candidates will not be able to ignore a situation which is in the headlines daily and involves millions of people,”
At every level of government, elected officials are jumping on the foreclosure intervention bandwagon, seeking to tighten lending regulations while make loan transactions more transparent and easy for consumers to understand. So far in 2007 local governments have introduced everything from toll-free foreclosure hotlines to free financial and legal counseling for distressed homeowners. Meanwhile a number of state legislatures are seeking to eliminate mortgage fraud and foreclosure rescue scams while amending Truth-in-Lending laws, state homeowner protection acts and even the state’s foreclosure laws themselves.
Other bills are requiring mortgage brokers to be licensed at either the state or national level and imposing on them a fiduciary relationship with consumers. The greater disclosure mandated by a fiduciary relationship is something Miller believes is appropriate to help prevent borrowers from taking out loans that they are ill-prepared to pay off.
“In the same way that a lawyer, doctor or real estate broker is obligated to provide advice which is best for a client or patient, why not loan officers?,” Miller queried. “Who in this process represents the borrower or protects the borrower’s interest? Today the answer is no one, and this lack of a fiduciary obligation is a key reason why many borrowers have subprime financing and not lower-cost FHA loans, and why employed borrowers have used high-cost stated income loan applications when they could just as easily have qualified with a lower cost full-documentation process.”
Then there are those who would allow homeowners in distress a “stay” on a foreclosure for six months in order to restructure their debt (in effect a moratorium). National consumer groups have joined in this chorus in recent months, claiming a moratorium on foreclosures will go a long way to helping homeowners keep their part of the American dream.
“A moratorium on foreclosures? That’s crazy! The market will absorb them just fine. If a person can’t afford the property then get out. The person who can afford the asset is the one who deserves it. That’s what the bank wants anyway,” said real estate investor, trainer and radio host Doug Crowe. “I prefer that people be self-regulated. If there was a private regulation like the NAR (National Association of Realtors), I’d be all for it. If a government-run program, I don’t see it working.”
While Democrat presidential candidates Clinton, Obama, Edwards and Dodd duke it out over their own ideologies to solve the foreclosure problem, the Republican candidates are remaining tight lipped on the issue. President Bush has come out with his own plan, which nixes any chance of a federal bailout of lenders and consumers alike.
“The government,” said Bush at a recent press conference, “has got a role to play — but it is limited. A federal bailout of lenders would only encourage a recurrence of the problem. It’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could not afford.”
Both Crowe and Miller said they agreed in principle that the government should not bail out lenders or borrowers on a large scale.
“It’s generally understood that not all borrowers are the same,” Miller said. “Some lied on mortgage applications. Others were knowingly sold loan products which were unsuitable for their circumstances. In the first case lenders failed to properly underwrite borrowers and thus missed obvious cases of fraud and the opportunity to protect both investors and themselves. In the second case, lenders sold products to borrowers who relied on lenders for advice and information. Since lenders have no obligation to sell less expensive products or products that produce lower commissions and profits, the resulting chaos was pre-ordained.”
Balancing the Pros and Cons
“Those with overexposure in the residential mortgage market are going to have unsustainable losses and investors will pull out. We will see continued layoffs in certain aspects of banking as well,” Hasting said.
“As the dollar continues to decline, the deficit continues to grow. This time because the dollar is so bad and inflation is growing very quickly. We’re looking at a lot of inflation,”
Crowe also sees little positive to be garnered from government intervention in the mortgage crisis and the onslaught of heightened foreclosure activity.
“The biggest pro would be self-regulation by the industry. It has worked on so many levels. It works for NAR. A lot of industries have their own regulation standards. I can’t see national mortgage licensing — spending a billion in federal money to regulate. Self-regulation or some simple guidelines would make more sense than some big monster bureaucracy,” Crowe said.
Miller does not believe that self-regulation on the part of the mortgage industry alone will be enough to truly address the root issues that have caused the upheaval in the mortgage market and rippled out to affect the overall economy.
“The mortgage marketplace is a huge part of the economy and even small tweaks in the current system are likely to produce unintended consequences. The real question, though, is different: Can we continue with a system which is fundamentally troubled and which will produce more instability if not changed? The system as currently constructed relies on voluntary lender behavior and such behavior has been shown to produce results which threaten large segments of the economy. That’s an untenable situation and one which needs to be changed,” Miller said.
“Government is huge,” he added. “There is nothing it does which does not have pros and cons, but it is equally true that when government does nothing there are also pros and cons. Rather than finance new programs, the government will seek to expand self-financing efforts such as the FHA program and to establish rules which shift costs to the private sector. For instance, better loan disclosures cost virtually nothing to the government but give borrowers more equality with lenders in the marketplace.”
At the end of the day, it seems to be preordained that government — at all levels — feels obliged to do something to help mitigate the situation, and has already begun the process. How much regulation will finally pass scrutiny and get signed into law, and how much of a hands-off approach is left for the lending industry to regulate on its own, if still to be determined.
One thing is certain: the government is going to have its say, and the public is going to feel the effects — good or bad — for many years to come.