Federal Reserve to release mortgage regs; expert comments

THOUGHTS FROM DECEMBER 18, 2007


As you may know, tomorrow, the Federal Reserve is expect to unveil new regulations on mortgage lending. Kurt Eggert, a law professor from Chapman University School of Law who has testified to Congress on these issues and is a past member of the Federal Reserve Board's Consumer Advisory Council, provides some preliminary thoughts below:

“By tightening up underwriting standards, the Fed would help borrowers, investors and even lenders. The subprime meltdown occurred in large part because subprime lenders were making bad loans that were too likely to default. Borrowers were burned by loans they couldn't repay, and investors were burned by excessive defaults. Even lenders were harmed when the secondary market for subprime loans collapsed. By tightening underwriting standards, the Fed can reestablish faith in the subprime market,” Prof. Eggert says.

“This is no time for half measures. Under Greenspan, the Fed deferred to market participants to set the rules for the subprime market, which led to a Wild West atmosphere and led to the subprime meltdown. Some have argued that regulating the subprime market will reduce access to credit, but we have seen that the opposite is true. By establish clear and effective rules that require effective underwriting, escrowing of tax and insurance, and requiring effective documentation of the ability to repay the loans, the Fed could increase the access of beneficial credit to borrowers and increase investor confidence in subprime loans,” Prof. Eggert concludes.