American Banker

August 3, 2007 



To the Editor:

As problems with the mortgage market continue to grow, it is becoming clear that the recent spike in defaults will not be limited to the riskiest loans ["Industry Keeps One Eye on American Homes"]. It is time for banking regulators to take serious action to restore confidence in the mortgage industry.

The proliferation of inadequate and, in many cases, nonexistent underwriting standards for mortgage products with risky features has spoiled the dream of homeownership for some and threatened the property values of many.
It is not just investors that are facing a crisis. Working families, whose largest investment is in their home, are facing a major threat to their financial stability.

It seems reasonable to hold lenders accountable to basic standards that make sure borrowers are getting loans they can truly afford. While this seems simple, our experience with predatory mortgage reform at the state and federal levels has been anything but.

Previous laws failed to prevent the current crisis for a very simple reason. The nature of predatory and abusive lending is such that any attempt to regulate specific products or practices simply serves as an impetus for unscrupulous lenders to develop new methods for preying on vulnerable homeowners.

A national law that sets comprehensive standards for mortgage lending is still an elusive goal, even though the need for such legislation becomes more critical each day. In consequence, the agencies that regulate mortgage lending and are charged to protect the interests of both consumers and investors need to start doing their jobs.

Recently federal bank regulators finally took the first steps to stop risky loans by issuing an advisory letter to banks detailing mortgage lending practices that the regulators find troublesome.

This, however, is insufficient. The next step is for the Federal Reserve Board to use its rulemaking authority under the Home Ownership and Equity Protection Act to apply this guidance as rules for all mortgage lenders.

Without such a step, American homeowners will remain vulnerable to mortgages with abusive and deceptive terms.

Malcolm Bush, President
Woodstock Institute