Will Subprime Self-regulate?

From the St. Louis Post Dispatch:

Reform, not rescue

As homeowners by the millions fall behind on their subprime mortgages, cries for a government bailout are starting to echo through Washington. That would be a very bad idea. It would reward irresponsible lenders and leave the taxpayers holding the bag. Rescuing the irresponsible only leads to more reckless lending.

But there are things that government should do to ease the crisis and prevent a repeat of the current mess. For starters, Congress and the White House could light a fire under the moribund Federal Housing Administration.

Subprime loans are made to people who can’t qualify for prime-rate mortgages. Generally these are people with poor credit, little savings or not enough income to safely support their home loan.

Long before the subprime lending industry sprang up, such loans were the province of the Federal Housing Administration. The FHA insures mortgage loans made by private lenders. That allows borrowers to borrow at rates 3 percentage points below comparable subprime loan rates. But the FHA bureaucracy long ago became sluggish and unresponsive. Until last year, it required lenders to send bulky loan applications in by mail, while subprime lenders often approved loans quickly and electronically. The FHA also was extremely picky about home inspections, insisting, for example, that missing doorknobs be fixed before it would approve a loan.

The FHA also wants permission to make no-down-payment loans and charge higher fees to riskier borrowers; that would let it compete more directly with subprime lenders. But Congress should be wary here lest the FHA wind up in the same sinking financial boat as subprime lenders. The FHA’s foreclosure rate is 2.19 percent, compared to 4.53 percent – and rising – for subprime loans.

Over time, the subprime crisis should be largely self-correcting. Lenders and their investors are taking a financial whipping they won’t soon forget. As a result, underwriting standards are rising sharply, and fewer shaky loans will be made in the future.

Government generally should take a light hand in regulating lending, lest it unintentionally cut off credit on which the American economy runs. But government could and should rein in some of the sleazier practices in the subprime industry, including predatory loans laden with useless fees and exorbitant interest rates that push borrowers inexorably toward foreclosure.

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7 Responses to Will Subprime Self-regulate?

  1. James Bednar says:

    From the Nation:

    The Loan Shark Lobby

    Representative Stephanie Tubbs Jones, whose home state of Ohio has among the highest foreclosure rates in the nation, introduced the Predatory Mortgage Lending Practices Reduction Act in 2005, which contained many of the same safeguards. It would also have provided grants for predatory lending education and given the Department of Housing and Urban Development, the Federal Reserve and the Federal Trade Commission the ability to define and take action against “unfair or deceptive” lending practices. Tubbs Jones is a member of the Congressional Black Caucus, which has strongly supported these measures, since blacks are nearly three times as likely to take out subprime loans. (Representative Dennis Kucinich, also a supporter of Tubbs Jones’s bill, opened subprime hearings after the New Century collapse.)

    Both bills died after being referred to financial services subcommittees, whose current and former heads have received money from New Century: Representative Paul Kanjorski has seen $42,095; Spencer Bachus, $31,743; and Richard Baker, $7,000.

    New Century did take the lead in pushing for some legislation–the Responsible Lending Act, which would have hurt consumers by narrowing the definition of subprime mortgages and pre-empting stricter state laws. The bill’s patron saint was Bob Ney, the Ohio Representative now serving a thirty-month federal prison sentence for corruption. New Century has spent more than $1.6 million lobbying in the past three years, and over time has contributed to the campaigns of nearly 60 percent of those who co-sponsored Ney’s bill, including $49,300 to Ney himself.

    With Democrats in control of Congress, the prospects for meaningful subprime legislation may have improved, but don’t hold your breath. When the collapse became front-page news, prominent Democrats, including Hillary Clinton, jumped on the bandwagon calling for Congressional action, but it may be difficult for them to withstand the blandishments of the lobbyists. Mortgage bankers gave 40 percent of their $6.6 million in contributions to Democrats in 2006, before the party gained power, and eleven of the top twenty recipients were Democrats, including the top recipient, Clinton, who took in $108,100. Senator Dodd joined Barney Frank in a vague call for legislation but added that he is “a strong advocate of subprime lending.” New Century has given Dodd $15,000 since 2003, and Frank ranked ninth on the list of mortgage banking contributions, with $54,550 in 2006.

  2. metroplexual says:

    Maybe they should have given 50%! That will teach them.

  3. SG says:

    The grim reality in Washington, is no Bill get pushed unless there is powerful Lobby or Vote bank. The right thing is never pushed, as it probably never has either of them.

    The question remains, do they have to really do something this year? I don’t think so. What you are seeing is just getting out onto media bandwagon, for the likes of Senator Dodd. He needs some reason to be in public to remain viable candidate. In any case, if Congress does pass such a bill this year, President will not sign it. He has shown no inclination to do so.

  4. BC Bob says:

    Forget about Washington, The market has spoken. Remember, the market giveth and the market taketh. Get ready for approx 3 more years of declining prices. The market overshot by miles on the upside. The same will happen on the downside.

  5. x-underwriter says:

    BC Bob Says:
    Forget about Washington, The market has spoken.

    I agree. Wall Street not buying the crap mortgages will change things far faster and further than any b.s. government legislation. All of the market tightening we’re reading about in the last week is not a product of government. The market will correct itself.

  6. Frank says:

    I rather see the money wasted on subprime than on Iraq.

  7. BC Bob says:

    “Around the Markets: Short Sellers see more declines in subprime market”

    “The subprime guys are history,” said Steven Persky, chief executive of Dalton Investments, a hedge fund in Los Angeles that began shorting shares of subprime lenders two years ago. “They’re ultimately going to have to file” for bankruptcy.


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