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Low Refinance Rates Endangered When Legislation Rewards Bad Behavior

[Sep 22, 2009.]


Congress continues to discuss increased regulation of the mortgage finance industry.

Homeowners who are having a hard time qualifying for a much-needed refinance can be forgiven for wanting a blatant bailout of their own, after the banks received so incredibly much taxpayer money. However, mortgage legislation that rewards bad behavior is not good for anyone in the long run.

In particular, low mortgage rates won't happen if banks can't count on profits from making home loans. People may wish that banks operated as non-profits, but they decidedly don't.

Borrowers who are interested in the ultimate health of mortgage finance market in the United States must be careful not to cheer on legislation that encourages bad behavior.

Lying on Loan Applications Has Got to Stop

While certainly loan officers and lenders deserve much criticism for their atrocious practices on so-called "stated income loans," the obligation for borrowers to accurately report facts on their loan applications must be a part of the mortgage reform scenario.

As of now, there is plenty of talk in the media about the immorality of giving someone with $14,000 annual income a $350,000 mortgage, but there is precious little realization that in order to get such a loan, that person actively and in most cases consciously lied about their income.

Amazingly, civil and criminal penalties against loan officers, bankers, and borrowers who actively and consciously lied on loan applications has not happened and is not even being discussed.

Perhaps it should be. At the very least, any new regulations imposed on the financial industry should include mention of the obligations of borrowers to, um, not outright lie.

Value of Future Mortgage-Backed Securities Dependent Upon Responsible Legislation

Investors in mortgage-backed securities have been portrayed, sometimes unfairly, as capitalizing on the trend of "exotic instruments" such as bundled subrime loans. But this is not a simple case of evil investor greed destroying everything.

In fact, the ability of lenders to sell packages of home loans to investors is a fundamental reason why home loans have been available for the last 30 years. Over the past year and a half, the market for mortgage-backed securities has dried up almost completely.

Leaving the government as the "buyer of last resort" to keep the mortgage market afloat.

Leaving refinance options pretty limited for a lot of borrowers.

But now, the government is pulling back from its massive investment in mortgage-backed securities. Private investors are being actively courted to start buying home loans again.

That won't happen if egregious stuff like mass lying on loan applications is a part of the game. Low mortgage rates are only possible when some degree of systemic integrity is at work in the market.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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