US Government Finally Getting Serious About Mortgage Reforms

Tyler Cowen thinks that the Fed should not have a consumer-protection function. I'm largely sympathetic – it's not as though there's any shortage of other regulators in Washington who could pick up the slack – but in reality the Fed does more for consumers than Cowen gives it credit for. Look at this Ned Gramlich speech, for instance: the Fed was always at the forefront of efforts to ensure that (a) banks lent to blacks as well as whites, and that (b) banks lent to blacks at the same risk-adjusted interest rates at which they lent to whites. In this era of abundant credit, people sometimes forget about the redlining problem, but it was a big one, and we can thank the Fed, in part, for helping to solve it.

All that said, Edmund Andrews's front-page NYT article today, "Fed Shrugged as Subprime Crisis Spread," does compellingly describe a central bank which at best was committed to laissez-faire policies, or which at worst was trying to shore up the post-dot-com-crash economy by deliberately allowing the property bubble to inflate.

So I'm glad that the Fed has finally gotten around to responding, with policies designed, in the words of the AP's Jeannine Aversa, to "give people taking out home mortgages new protections against shady lending practices".

Most prepayment penalties would be banned on subprime loans: I like that. Underwriting standards would be tightened up on no-doc loans: I don't quite see the point of that one, but it certainly can't do much harm. And lenders would have to include tax and insurance payments along with mortgage repayments when making their underwriting decisions: well, duh. (Update: Tanta reckons this is an escrow thing, not an underwriting thing. Which, as she rightly points out, could be more problematic.)

The big change is that lenders would have to underwrite subprime loans based on the borrower's ability to repay over the duration of the mortgage, rather than just for the initial teaser period. This could well affect younger borrowers with a very good chance of seeing their income rise significantly by the time the reset comes, although without seeing the details of the proposal it's hard to know for sure. It will certainly serve to dampen the amount of property speculation going on among subprime borrowers, which must be a good thing.

Meanwhile, it's also worth noting that Hank Paulson has come out in favor of Fannie and Freddie being able to buy jumbo mortgages. It seems that the Federal government is – finally – getting serious about addressing problems in the mortgage industry. It's too late, of course. But better late than never, I suppose.