The Latest Mortgage and Regulatory Reforms



Mike Larson examines the last few months in the mortgage market and the regulatory and policy changes taking place. Mr. Larson discusses the plans that are being implemented by the Federal Reserve and the consequences of these plans.

It's been an active few months for the mortgage market on the regulatory and policy front:

Treasury Secretary Henry Paulson introduced a mega-plan called the "Blueprint for a Modernized Financial Regulatory Structure." Right now, different parts of the financial markets and different types of financial institutions are regulated by many government agencies. And for industries like insurance, supervision and regulation are essentially in the hands of the states, with little to no federal oversight at all. The focus of the regulatory plan is to consolidate agencies and responsibilities. One particular mortgage reform program is gathering momentum in Congress. It's a bill that would potentially:

- Provide $4 billion in grants that would allow local governments to purchase foreclosed homes.

- Help fund $10 billion in tax-exempt bonds that states can sell to fund mortgage refinance programs. They're designed to get people out of bad subprime loans and into more stable financing.

- Fund $100 million more in counseling programs designed to help borrowers facing foreclosure.

- Give home builders a tax incentive that allows them to offset past profits with current losses in order to bolster their financial state.

- Offer buyers of foreclosed or vacant homes a tax credit, possibly as much as $7,000.

Moreover, a plan from House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd may be gaining broader acceptance. They envision a program where the outstanding loan balances of borrowers would be written down. This would ensure the existing lenders took some losses.

Frank and Dodd are also working on a mortgage reform plan. Borrowers would be refinanced into loans insured by the Federal Housing Administration, or FHA. Those loans would have smaller monthly payments because less principal would be owed. Borrowers would also be encouraged to stay put and try to pay off their homes, rather than walk away, because they would no longer owe more than their homes are worth. But the borrowers would be required to offer the government "soft second" liens on their properties, meaning that the government would get a portion of its money back upon the sale of the homes down the road. The presumption is that by then, home prices will have gone back up and everyone will benefit. The policy of the Fed over the past several years has been to take a "hands off" approach to asset bubbles and regulation during the boom times. There was no move to raise margin requirements during the stock market bubble, for instance. And as the housing bubble expanded, Fed policymakers spent more time questioning the very existence of a bubble rather than lambasting lenders and speculators for helping inflate it.

The Fed didn't jack rates up aggressively to calm things down, either. In fact, they implemented clearly telegraphed, quarter-point hikes over a span of several quarters instead. The Fed is willing to slash interest rates dramatically, and throw huge helpings of money at the very same companies and individuals that helped cause the mess in the first place.

And despite all the pressure coming from government officials, Fannie Mae and Freddie Mac actually seem to be keeping standards relatively tight and even tightening them to reflect the very real risk of further price declines. And the Frank/Dodd proposals make sense in many ways because they would require lenders to take some losses, while also making any borrower who receives help pay FHA back for that aid by surrendering a chunk of any future appreciation.

"But the reality is that while the Fed can create excess liquidity and cut interest rates, it can't channel that liquidity to specific markets. Creating a rolling bubble scenario where the cure for popping one asset bubble ends up creating a fresh asset bubble "disease" somewhere else. The bottom line: Policymakers need to carefully consider the details of any and all bailout plans and the long-term consequences of their actions," Mr. Larson states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspxBanks-tightening-mortgage-lending-standards-as-real-estate-plummets-1630

About Mike Larson and Money and Markets

Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.

Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.

Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.

Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. Mr. Larson holds B.A. and B.S. degrees from Boston University.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.





The Latest Mortgage and Regulatory Reforms