Fed To Hold Hearing on Lending

A: Here it is! Thanks to Calculated Risk for showing me the way to this one. I've been saying for the longest time that the two biggest threats to housing were tighter lending standards and regulation and weaker jobs. While the subprime mess led to in-house adjustments in lending standards, now it seems the fed is about to chime in!

According to MarketWatch.com -

the Federal Reserve will hold a public hearing June 14 to consider adopting new rules to combat abusive lending, especially in the subprime market, the Fed announced Thursday. "The goal is to find ways to promote sustainable homeownership through responsible lending, informed consumer choice, and effective guidance and regulation," said Fed Gov. Randall S. Kroszner in a statement. The Fed said the hearing would "focus on how it might use its rulemaking authority to address concerns about abusive lending practices in the home mortgage market." The Fed has authority to issue regulations that cover all lenders, not just banks.

According to the Fed's Press Release -

The Board held four hearings in the summer of 2006 under HOEPA. Those hearings addressed three topics: (1) predatory lending and the impact of the existing HOEPA rules, and state and local anti-predatory lending laws on the subprime market; (2) nontraditional mortgage products such as interest-only mortgage loans and payment option adjustable rate mortgages, and reverse mortgages; (3) and, how consumers select lenders and mortgage products in the subprime mortgage market.

Based on testimony and public comment from the 2006 hearings, and in response to increased subprime mortgage foreclosures, the Board plans to hold a fifth hearing that will focus on how it might use its rulemaking authority to address concerns about abusive lending practices in the home mortgage market.

As I said before, if the fed puts regulations on the lending industry to protect the consumer from abusive lending tactics, the following will occur:

1. Weak Credit Buyers Will Lose Loan Options That Otherwise Would Make A Home Purchase Affordable - such as a I/O 3YR ARM for someone with no credit history

2. Purchasing Power Will Be Restricted With Less Loan Options

3. Home Affordability Will Be Tested Before Loan Commitment Issued

4. Buyer Pool Will Restrict As Purchasing Power Restricts

So that we are clear...

Fed regulation on lending standards is meant to protect the consumer from abusive tactics that otherwise would provide a buyer with a loan who should have never got one in the first place! If regulation is placed on the lending industry to protect the consumer, less options will be available to the purchaser and more stringent guidelines will have to be met to underwrite the loan. Put this all together and that means a restriction of purchasing power and the number of buyers that could ultimately afford the home.

Here are a few of my past articles on the topic:

Regulations on Lending? You Bet Ya! (Jan. 18th, 2006)

Credit Crunch: Tighter Loan Standards? (Jan. 30th, 2007)

Lenders Starting To Tighten..! (Feb. 13th, 2007)

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