Beware future of government in US lending practices

In the aftermath of the subprime hysteria, the US Congress has threatened intervention more than once. While the Mortgage Forgiveness Debt Relief Act of 2007 is a good move, it is legislation that offers a better solution.... that being an effective tax reduction by not collecting income tax on homeowners' losses in short sales/preforeclosure. Get serious - it's much easier to not give your money to the feds in the first place than to try and get it back. Despite which party controls Congress, they are all serious spenders.

Ben Bernanke's testimony before the House Committee on Financial Services September 20, 2007 gave a good historical overview of when and how the subprime problems bubbled to a head.

Subprime mortgages are loans intended for borrowers who are perceived to have high credit risk. Although these mortgages emerged on the financial landscape more than two decades ago, they did not begin to expand significantly until the mid-1990s. The expansion was fueled by innovations--including the development of credit scoring--that made it easier for lenders to assess and price risks.

In addition, regulatory changes and the ongoing growth of the secondary mortgage market increased the ability of lenders, who once typically held mortgages on their books until the loans were repaid, to sell many mortgages to various intermediaries, or "securitizers." The securitizers in turn pooled large numbers of mortgages and sold the rights to the resulting cash flows to investors, often as components of structured securities.

This "originate-to-distribute" model gave lenders (and, thus, mortgage borrowers) greater access to capital markets, lowered transaction costs, and allowed risk to be shared more widely. The resulting increase in the supply of mortgage credit likely contributed to the rise in the homeownership rate from 64 percent in 1994 to about 68 percent now--with minority households and households from lower-income census tracts recording some of the largest gains in percentage terms.

snip

During the past two years, serious delinquencies among subprime adjustable-rate mortgages (ARMs) have increased dramatically. (Subprime mortgages with fixed rates, on the other hand, have had a more stable performance The fraction of subprime ARMs past due ninety days or more or in foreclosure reached nearly 15 percent in July, roughly triple the low seen in mid-2005.

For so-called near-prime loans in alt-A securitized pools (those made to borrowers who typically have higher credit scores than subprime borrowers but still pose more risk than prime borrowers), the serious delinquency rate has also risen, to 3 percent from 1 percent only a year ago.

These patterns contrast sharply with those in the prime-mortgage sector, in which less than 1 percent of loans are seriously delinquent.

There are two important points here. First, contrary to hyped media reports, the percentage of defaults is a small percentage of overall loans in the country, and highest among subprime ARMs... or those borrowers who deliberately chose not to look ahead to the payments after the loans reset.

By contrast, the fixed subprimes, Alt-A and other "less than perfect" credit borrower delinquencies are also a very small percentage of the mortgage industry. This brings the culprit down primarily to one large group - those who opted for the subprime ARMs in order to purchase more home than they could realistically afford than with a comparable fixed loan alternative.

The second important point is that subprime loan packages have been around for quite a while prior to this default trend. Yet regulatory changes (in other words, the US Congress) was one of the factors contributing to the perceived decreased risk of subprime loans for the credit challenged.

An example of this is trend to push loans on to this sector of the population was prevalent even back in Oct of 2003, when ACORN was providing studies that suggested there was racial disparity in lending practices and recommending changes to the Fair Credit Reporting Act. In short, Congress itself, along with special interest groups, have lent a hand in contributing to the easy ARM money - targeting mostly the minority, credit challenged population - leading to the mortgage predicament today.

You will notice that no where on the ACORN site about their "campaigns" are they touting their earlier pressure on Congress to increase loan opportunities to the financially challenged - the sad reality of which constitutes a very large percentile of minorities.

Now I told you these historic stories about US government intervention merely to tell you this story.... It appears that Venezuela's Hugo Chavez had imposed controls over a sector of that country's lending practices. And his penalty for banks not following his guidelines? Seizure of the bank.

CARACAS, Venezuela -- President Hugo Chavez threatened on Saturday to take control of banks that fail to meet state-imposed loaning requirements designed to benefit Venezuela's farmers.

Chavez, who says he is leading Venezuela toward "21st century socialism," accused many private banks of neglecting laws requiring them to set aside nearly a third of all loans for agriculture, mortgages and small businesses at favorable rates.

"The law must be applied," Chavez said during a televised meeting with farmers. Any bank that doesn't comply with these lending requirements "should be seized."

One could only hope that the US Congress would not apply such draconian measures in their efforts to "protect the consumer". Indeed, history shows their foray into over-regulation of private enterprise does not yield the desired results most of the time. Consequently any efforts, other than reducing tax liabilities, should be carefully monitored by the American consumer so we don't find ourselves in "Venezuela", so to speak.

As it is, the private lending industry itself has responded with the needed corrections voluntarily, leading to turning the topsy turvy world right again. Just as it should be.