Realty Check

Bernanke's Mortgage Medley

In a speech today at the Federal Reserve Bank of Chicago, Fed Chairman Ben Bernanke detailed the many ways in which financial regulators, including the Federal Reserve and Congress, could act in order to prevent a recurrence of the subprime mortgage crises. Okay, not many ways -- four ways:

  1. Require disclosures by lenders that help consumers make informed choices
  2. Prohibit clearly abusive practices through appropriate rules
  3. Offer principles-based guidance combined with supervisory oversight
  4. Take less-formal steps, such as working with industry participants to establish and encourage best practices or supporting counseling and financial education for potential borrowers

Okay, I can see steps 1 and 2, if there are really clear new laws in place, but 3 and 4 strike me as bunk. The Fed does need to be careful, I give you that. "In deciding what actions to take, regulators must walk a fine line; we must do what we can to prevent abuses or bad practices, but at the same time, we do not want to curtail responsible subprime lending or close off refinancing options that would be beneficial to borrowers," Bernanke said.

My question, even with steps 1 and 2, is: why is all this a new idea? I mean, I thought all this stuff was in place already; you know, like the federal government might have already had some rules in place to keep banks and lenders from ripping me off. I mean, there is an awful lot of big, grey federal buildings downtown near where I work, and they look like the type of place where people might write down stuff like that and put little official seals on it.

Chairman Bernanke did teach me a few new terms in today’s speech: TILA, HOEPA and Regulation Z. No, he hasn't been watching too much "Star Trek: Deep Space 9" on Spike; actually, he's talking about rules already in place, like the Truth in Lending Act, the Home Ownership Equity Protection Act and the Z thing, which implements TILA (whatever that means). Actually, "the purpose of Regulation Z is to ensure that lenders provide borrowers or potential borrowers with clear, accurate and timely information about the terms and conditions f loans," Bernanke said.

I'm still asking the same question. If all this stuff is there already, then why is housing in the mess it's in now? Why is the exalted Chairman of the Federal Reserve suggesting that we suddenly make use of all this stuff? Where were the people who wrote all those funky acronyms during the heady froth of the housing boom?

I really hate quoting politicians, but here goes:

"The Chairman misspoke when he said that the Federal Reserve is 'authorized' to write rules by the Home Ownership and Equity Protection Act (HOEPA). In fact, the law requires the Federal Reserve to write rules to protect home borrowers from unfair or deceptive practices," claims a 'Statement of Senator Dodd in Reaction to Bernanke Speech at the Chicago Federal Reserve Bank Conference.'

I actually like Senator Chuck Schumer's (D-N.Y.) response a little better: "I hope that Chairman Bernanke is right when he says that a slumping housing market will not affect the broader economy, but I would not bet the house on it." Sue me, but I love a good cliché!!

Questions?  Comments?