Mark Winston Griffith
The Federal Reserve Fails Leadership Test on Subprime Crisis
"The staff of the Financial Services Committee and I have had a chance to review the Federal Reserve's proposed rules regarding abusive subprime loans. We now have confirmation of two facts we have known for some time: one, the Federal Reserve System is not a strong advocate for consumers, and two, there is no Santa Claus. People who are surprised by the one are presumably surprised by the other."
-- Rep. Barney Frank, chairman of the House Committee on Financial Services, December 18, 2007
On the same day the Federal Reserve proposed a new set rules to help guard against predatory subprime lending practices, the New York Times reported on the Fed's historical failure to respond to subprime abuses, despite alarms that advocacy groups (including NEDAP) and others have been sounding for years. The truth is, with literally millions of toxic, exotic loans having already been made, and with investors in the subprime mortgage industry in retreat, regulating the subprime industry at this stage is like sending in the bomb squad into Hiroshima after viewing the mushroom cloud.
Nonetheless, there is a desperate need for a new set of standards for mortgage lending. And the Fed's proposed rules, which will now face a public comment period, focused on four areas of subprime lending that are certainly worthy of concern: Ensuring the borrowers ability to pay; limiting pre-payment penalties; mandating the establishment of escrow accounts for insurance and taxes; and eliminating "no doc" or "stated income" lending.
Unfortunately, a close reading by both policy makers and fair lending advocates has exposed significant weaknesses in the proposed rules. One of the most damning assessments is made in a statement issued by Senator Chris Dodd. The Federal Reserve, he said, does "not even have the courage of its convictions - - the Board weakened its earlier guidance on requiring an originator to fully analyze a borrower's ability to repay the mortgage at the fully indexed rate, the most fundamental measure of good lending. Because this rule requires a showing of a 'pattern and practice' of violations, no individual subprime borrower would be guaranteed the protections that the earlier guidance promised to extend -- that the mortgage they receive will be affordable to them, even after the payment shock hits."
If the Fed rules ultimately don't ensure that mortgages are affordable to borrowers AFTER adjustable rates have re-set, they will have missed their mark entirely.
In the coming weeks, as advocates have a chance to fully analyze the rules, a more comprehensive critique will unfold. In the meantime, considering how long it is taking Congress to respond to the subprime and foreclosure crises, there seems to have been more than one Nero fiddling while Rome has burned.