In Reversal, Evil Fed Approves Plan to Curb Risky Lending


Richard Moore

The headline says it all. First the Fed loosened up the credit, and now they're 
tightening it up. Not only did they 'loosen it up', by the way, they actually 
sent out letters, encouraging lenders to branch out into 'no document' loans, ie
no documentation of ability to repay.

In the media, there is much discussion about foreclosures, and about bank 
losses. One could easily get the impression that home buyers and banks suffered 
alike, in the bursting of the housing bubble. That would be a very wrong 
impression. The fact is that the banks made out like bandits. Let's do the 

If there are 20% foreclosures, for example, that means the banks are losing a 
PORTION  of 20% of their potential profits -- they do auction the houses off for
something not too far from market price. In other words, it's like they're 
collecting in full on about 90% of their loans, and many of the borderline 
buyers will be suffering like hell to make their payments every month on their 
negative-equity domiciles.

By loosening up credit in the way they did, they intentionally created the rapid
rise in house prices. By intentionally bringing unqualified buyers into the 
game, they increased overall demand in the market, which boosted overall prices 
just that bit more. Those 80% good mortgages they're holding are based on prices
several times what they would have been if the bubble had not been created.

That's banditry.  The losses are trivial in comparison to the overall profit 
increase caused by the bubble. And the mortgages are variable rate. As the Fed 
manipulates interest rates up and down, it's like a noose around the neck of the
mortgage holders, sometimes its loose, sometimes it tightens up, and sometimes 
it gets scary.

Banks are evil.

This cycle of ( loose credit -> bubble -> tight credit ) is a standard practice 
of the Fed. It's a little program they run every once in a while, eg Roaring 
Twenties -> Great Depression. It always shovels a pile of gold into their money 
vault, and it always leaves them in possession of assets at below market prices.

Very evil.


Original source URL:

December 19, 2007

In Reversal, Fed Approves Plan to Curb Risky Lending

WASHINGTON ‹ The Federal Reserve, acknowledging that home mortgage lenders 
aggressively sold deceptive loans to borrowers who had little chance of repaying
them, proposed a broad set of restrictions Tuesday on exotic mortgages and 
high-cost loans for people with weak credit.

The new rules would force mortgage companies to show that customers can 
realistically afford their mortgages. They would also require lenders to 
disclose the hidden sales fees often rolled into interest payments, and they 
would prohibit certain types of advertising.

Borrowers would be able to sue their lenders if they violated the new rules, 
though home buyers would be allowed to seek only a limited amount in 

³Unfair and deceptive acts and practices hurt not just borrowers and their 
families,² said Ben S. Bernanke, chairman of the Federal Reserve, ³but entire 
communities, and, indeed, the economy as a whole.²

The new regulations, expected to be approved in close to their proposed form 
after a three-month period for public comment, amount to a sharp reversal from 
the Fed¹s longstanding reluctance to rein in dubious lending practices before 
the subprime market collapsed this summer.

The proposed changes, which do not apply to standard mortgages for borrowers 
with good credit, stopped short of banning all heavily criticized practices in 
subprime lending and did not go as far as many consumer groups had sought. But 
they won praise as worthwhile steps from some industry critics who had long 
complained that the Federal Reserve under its former chairman, Alan Greenspan, 
persistently ignored signs of trouble.

³Reading these proposals today is almost painful,² said Dean Baker, co-director 
of the Center for Economic Policy Research, a liberal research group in 
Washington. ³These are all just simple, common sense regulation. Why couldn¹t 
Greenspan have done this seven years ago?²

If the measures had been in place earlier, they would have applied to as many as
30 percent of all mortgages made in 2006.

Some advocacy groups that had warned for years about reckless practices said the
Fed¹s move was too little and too late.

³The Federal Reserve¹s proposed guidance is riddled with loopholes and 
exceptions that will undermine its effectiveness,² said Deborah Goldstein, 
executive vice president of the Center for Responsible Lending, a nonprofit 
group in Durham, N.C. ³The proposals fall far short of what was needed, and in 
some ways fall short of where the industry was already headed.²

The new rules would do nothing to help the hundreds of thousands of people who 
are either already defaulting on subprime mortgages or are likely to lose their 
homes when their introductory teaser rates expire and their monthly payments 
jump by 30 percent or more.

Soaring default rates among subprime borrowers have already caused a crisis on 
Wall Street, all but shutting down the subprime mortgage market since August 
because lenders could no longer raise the cash to make new loans. The Bush 
administration has pushed for voluntary agreements aimed at avoiding some, but 
far from all, of the foreclosures expected next year.

The American Banking Association praised the Fed¹s action as ³an important 
proposal that would make a significant difference in protecting mortgage 
borrowers.² But the industry group warned that some provisions might go too far.
³We worry that replacing important lending flexibility with rigid formulas might
also limit lending to some creditworthy borrowers.²

In Congress, leading Democratic lawmakers said the Fed had been too cautious.

Representative Barney Frank of Massachusetts, chairman of the House Financial 
Services Committee, said the central bank showed it was "not a strong advocate 
for consumers." Senator Christopher J. Dodd of Connecticut, chairman of the 
Senate Banking Committee, called the proposal a "step backward."

The House recently passed a bill last month that would impose even tougher 
restrictions on many subprime practices that the Fed addressed on Tuesday. The 
Senate has not acted on a bill, but Mr. Dodd recently introduced a measure with 
many of the same goals as the House bill.

Despite their limitations, the central bank¹s new proposals would nonetheless 
cut a wide swath across the nation¹s fragmented mortgage system. They would 
govern practices for all mortgage lenders, regardless of whether they are banks,
thrift institutions or independent mortgage companies. And they would apply 
regardless of whether a lender is supervised by federal or state regulators.

The most important indicator that the Fed wanted to throw down the gauntlet is 
in how it defined the mortgages that would be subject to special consumer 

Under its existing rules, based on the Home Ownership Equity Protection Act of 
1994, the Fed¹s extra protections applied to less than 1 percent of all 
mortgages ‹ those with interest rates at least eight percentage points above 
prevailing rates on Treasury securities.

The new rules, by contrast, invoked broader legal authority to apply to any 
mortgage with an interest rate three percentage points or more above Treasury 
rates. Fed officials said that would cover all subprime loans, which accounted 
for about 25 percent of all mortgages last year, as well as many exotic 
mortgages ‹ known in the industry as ³Alt-A² loans ‹ made to people with 
relatively good credit scores.

Under the new rules, such borrowers would have to document their incomes, supply
tax returns, earnings statements, bank records or other evidence. Lenders would 
not be allowed to qualify a person based only on their ability to pay the 
initial teaser rate.

The proposal would essentially end the practice of allowing those with poor 
credit to apply for ³stated income² loans, often known as ³liar¹s loans,² which 
do not require borrowers to provide evidence of their incomes and assets. And it
would restrict mortgages with future monthly payments beyond those that could be
justified by a borrower¹s projected earnings.

The Fed proposal would still leave some room for flexibility. Lenders would have
to provide ³reasonably reliable evidence² of a person¹s income, a definition 
that Fed officials said would allow small business owners and others whose 
income may be erratic or difficult to confirm to arrange a subprime mortgage.

The Fed also refused to prohibit the much-criticized subprime lending practice 
of big prepayment penalties. Prepayment penalties, which can cost thousands of 
dollars, often block people from switching to a cheaper mortgage for two years 
or longer.

Mortgage lenders argue that prepayment penalties are often essential, because 
they provide investors with assurance of earning more than just the low teaser 
rates. But consumer groups have argued that the penalties can trap borrowers in 
expensive loans and that many home buyers do not properly understand them.

Under the Fed proposal, lenders would still be allowed to demand prepayment 
penalties, but the penalties would have to expire at least 60 days before a 
loan¹s introductory rate was scheduled to reset at a higher level.

The new rules would also make it more difficult for lenders to include hidden 
sales fees, which are usually paid to the mortgage broker. Many subprime lenders
tell borrowers they will not have to pay any fees, or even any costs for 
services like appraisals, but include those fees in what is called a 
³yield-spread premium² on the interest rate.

The Fed proposal would not prohibit yield-spread premiums but would require that
a lender disclose the exact amount of the fees and have the borrower agree to 
the fees in writing.

John Taylor, president of the National Community Reinvestment Coalition, a 
housing advocacy group, said simply disclosing the fees was not enough because 
home buyers were already inundated with a blizzard of disclosure forms to sign 
and can easily miss the significance of what they are approving.

Borrowers ³shouldn¹t need to be a lawyer or financial expert,² Mr. Taylor said, 
³to protect themselves from unfair and deceptive lending.²

Copyright 2007 The New York Times Company

€ Privacy Policy Search Corrections RSS First Look Help Contact Us Work for Us 
Site Map

Posting archives:

Escaping the Matrix website:
cyberjournal website:

How We the People can change the world:

Community Democracy Framework:

Moderator: •••@••.•••  (comments welcome)