The Democrats are now diving into the discussion about cleaning up the mortgage industry and subprime lending. I’ve written quite a bit about the importance of avoiding the curse of being house poor. The rising foreclosure rate is due to two major factors. Mortgage lenders are loosely regulated and consumers made uneducated, selfish financial decisions. So now it’s the democrats to the rescue! I read the article from CNN Money, and i was a little surprised to see that I actually liked some of their ideas. I am definitely about capitalism, but financial agents need to have a fiduciary duty to their customers. It should not matter if it’s an insurance agent, mortgage lender, or stock broker. Christopher Dodd proposed these ideas to help regulate the subprime industry:
- End prepayment penalties – the fees paid if a borrower chooses to pay off a mortgage early.
- Tighten underwriting standards so that borrowers are judged on their ability to repay the loan at fully indexed rates rather than at low teaser rates.
- Require lenders to escrow for taxes and insurance and disclose those expenses to borrowers
- Cut down loans that require little or no documentation proving a borrowers’ assets or income – the so-called “liar loans.”
The prepayment penalty is ridiculous. I don’t think their should be a financial incentive to lock you into a mortgage for a specified amount of time. The proposed idea about tightening up underwriting standards is the most important in my mind. Mortgage companies would save a great deal of money on foreclosure costs if they would tighten up their guidelines for qualifying for a mortgage. The argument is that less people will be able to pursue the American dream of owning a home. Let’s think about this for a minute. Buying a house with a mortgage payment that goes up $300 a month in one year which causes more fights with your spouse, less food on the table, more credit card debt, and more stress in your life is the American dream? I’ll say this slowly: W-A-I-T U-N-T-I-L Y-O-U H-A-V-E S-O-M-E M-O-N-E-Y. If you don’t have an emergency fund when you buy a house, something will go wrong. It’s not a negative outlook on life, it’s just life. Life happens, and life is expensive sometimes.
The Money Crashers Solution:
There should be negative consequences for mortgage lenders that sell a mortgage to a consumer. The mortgage industry should follow the mold of the insurance industry. Independent agents of insurance companies own their own companeis but they act as agents for the carrier. The carrier can drop an agent at any time if their loss ratios become too high or they do not cooperate with their underwriting guidelines. If mortgage lenders start depending on keeping the business of a certain mortgage lender, then they will start thinking twice about “creatively” finding a way for anyone to qualify for a mortgage. How about taking away the commissions of a mortgage broker for every loan that defaults? That would teach the bastards not to find a way to loan $400k to a family with a $50k household income.
That’s my take. What’s your take? What’s your solution to cleaning up the subprime mortgage lending industry?