In an attempt to rectify the subprime mess, the Federal Reserve has announced new regulations to clean up deceptive lending practices.
Some observers say the rule making is the Fed's most significant response to the subprime lending ordeal yet. But others question if the proposed rules are riddled with loopholes that may permit some of the bad behavior to continue. Some in Congress say the rules will not help protect consumers and, in fact, advocate weaker lending standards than those outlined by the Federal Reserve a few months ago.
Federal Reserve Chairman Ben Bernanke intimated that the rule making was akin to splitting a baby establishing a regulation that deters improper lending and advertising practices without curbing the availability of mortgage credit. Some lenders didn't require borrowers to provide proof of income when seeking loans. On the other hand, some lenders have misled borrowers, selling them "fixed" loans that weren't truly fixed over the life of the loan. The new rules require more prominent disclosure of rates or payments over time, as well as the initial "teaser rate."
While the new regulations may help future borrowers and lending institutions, the rules could be likened to closing the barn door after the horse has bolted. True, the new regulations, assuming they will be adopted after the 90-day comment period, will help curb future abuses. The larger looming question is the long-term economic impact of the subprime crisis in general. Will the bailout plan work, or is it, too, ripe for abuse?
There is plenty of blame to go around in the subprime crisis. Some lenders made loans to people they likely knew could not afford the interest rate increases in their adjustable-rate mortgages. Some people scarcely qualified under the so-called "teaser rates." Some consumers may have overestimated their ability to pay higher mortgage rates over the life of a loan. Other homebuyers simply did not understand the terms of the mortgages. Still others obtained these loans to purchase homes on a speculative basis, betting on inflation. When the real estate market soured, they were saddled with loans they could not retire because they had not anticipated holding the note on the "spec" homes this long.
We hope both the bailout and the new regulations will help improve the housing market and rein in unscrupulous lenders. But at the end of the day, most of this heartbreak could have been avoided if people spent as much time reviewing mortgage loan offers as they do researching consumer electronics purchases. More importantly, people need to recognize that establishing a strong credit track record is an investment in their future. Otherwise, they will be at the mercy of lenders who can charge higher and/or escalating interest rates for home loans.