Will Tighter Lending Rules Matter?

We often call the chairman of the Federal Reserve "Gentle Ben" Bernanke, because that has been his approach so far to the subprime mortgage crisis: No table-thumping, no finger-wagging, no jawboning -- just gentle prodding of lenders to be more careful in the future.

The Fed and other regulators issued new guidelines Friday advising -- but not requiring -- some lenders to fully consider whether subprime borrowers can afford their mortgage payments after the cheap "teaser" rates expire.

The guidelines do not apply to independent, state-regulated lenders, but are still expected to have some impact.  The New York Times: "The rules are likely to make it harder for some borrowers to qualify for loans, although many lenders have been tightening their standards in response to rising levels of foreclosures and mortgage delinquencies."

The Fed could have thrown its weight around, but chose not to, as Floyd Norris points out: "The Federal Reserve chose not to use the authority it has under a 1994 law to impose the rules on all mortgage lenders, said Michael D. Calhoun, president of the Center for Responsible Lending."

The problem, as we see it, is that the Fed waited so long that it can't really throw its weight around. Much tougher lending standards now would probably drive housing prices lower, which would leave even greater numbers of recent home-buyers upside-down, which would lead to more foreclosures, which would scare Wall Street investors away from mortgage-backed securities, which would tighten credit even further, and on and on. The Fed is stuck at this point, wishing and hoping that the mortgage mess doesn't get worse.

Photo Credit: Reuters

Comments

[Travelingman]

What's happening on Wall Street is concerning

another factor - All these hedge funds and CDOs that have been valuing their holdings at par ("100 cents on the dollar") even though they're not worth anywhere near par, will be deficient at their next SEC exam for fraudulent valuation. Fair valuation is an extremely hot topic with the SEC because valuation is what determines net asset value (NAV) and NAV is what determines performance fees earned by the fund. This could even lead to enforcement cases (civil and criminal) by the SEC.

If the SEC gets involved, it can be a tipping point when you factor now that the rating agencies are downgrading these funds.

Lenders are becoming more strict so even the fed have these releases,I'm hearing of more and more stricter lending and lots of sub-prime credit is vanishing

Bill Gross' comments are really insightful. if defaults exceed 7% and we're talking about $700B in mortage re-sets, that could impact the US economy and beyond in very unhealthy ways

[phyllis]

We forecasted this several years ago. Anyone with half a brain and a little experience from past downturns could see this coming.
The fed was terribly remiss in not throwing their weight around earlier. I know they were trying to keep the 2000 stock market mess from accelerating but all they did was create another bubble.
The end won't be pretty but we investors will be there to pick up the pieces.