Avoiding Another Mortgage Meltdown

It's easy for Democrats to portray America's subprime loan crisis as a massive failure by a Republican led government and now 2 million American families could be about to lose their homes.

Perhaps democrats have a point.  Many borrowers were confused and deceived by the tactics used to sell subprime loans.  Largely unregulated mortgage brokers falsified borrowers' incomes, reaped steep commissions for steering them into unnecessarily costly loans, and misled them about the true cost of borrowing.  Homeowners ignored the risks they were taking; government neglected its duty to warn them.  There was a failure of individual responsibility but, much more than that, a failure of minimalist regulation.

Congressman Barney Frank, Democratic chairman of the powerful House financial services committee, recently introduced a bill that could help prevent a repeat performance.

The bill would eliminate some of the perverse incentives that warped the market for such loans.  Mortgage originators would have a "duty of care" to make only those loans a borrower has a "reasonable ability" to repay.  The bill would ban the bonus fees paid to brokers for putting borrowers in overly expensive loans.

Homeowners would be able to sue over improper loans, but investors who buy securitised mortgages would not be liable.  The bill bars costly class actions and excessive damages, and offers a safe harbour from liability for loans that meet certain criteria.

This is a good first step towards responsible regulation.  Pretending government has no role in the crisis is simply irresponsible.

What role do you think government should take in preventing another mortgage meltdown and foreclosure crisis in the future?  We'd love to hear your opinion.  Use the comment link below to tell us what you think.  Your email address, although needed to send us your comment, will NOT be posted with your comment.  We respect your privacy and do not publish anyone's email address here.  We look forward to hearing your comments.

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Real Estate: No Light in Sight

For those in the real estate industry and for those looking to buy or sell a home, it could take until 2009 to catch a break.

That's the forecast from Doug Duncan, chief economist for the Mortgage Bankers Association (MBA).   Duncan expects national median home prices to fall between 2 percent and 4 percent both this year and next. Prices will be held back by an oversupply of homes for sale, an increase in foreclosures and continued uncertainty among mortgage investors.

For this year, Duncan is predicting a 22 percent drop in new home sales and a 12 percent drop in existing home sales, followed by a 10 percent drop in each next year.

What? No good news?

There's one group of home buyers, home sellers and loan originators who will have an easier time of it than everyone else: those dealing with "anything that's conventional and conforming," Duncan said. In other words, 30-year fixed rate mortgages for borrowers with good credit under the "jumbo" cutoff of $417,000.