Subscribe to my Feed
« Make overdue apologies part of your spring cleaning | Home | So much for corporate responsibility at Wal-Mart! »
Are tougher mortgage regulations really the ticket?
By Lauren | March 27, 2008
As the press continues to dig into the subprime mortgage crisis, I’ve been appalled to learn that lenders have been allowing would-be home owners to borrow hundreds of thousands of dollars based on their unsubstantiated representations about their salaries and, in many cases, without requiring even modest down payments. We now discover that, in all too many instances, people have inflated their salaries on mortgage applications and now find themselves deeply in debt without any way to pay the money back and without any home equity to support refinancing. It seems that lenders, eager to reap fast profits from the housing boom, never bothered to confirm that the facts alleged in loan applications were actually true, and waived down payments to keep the applications rolling in.
To quote a friend and colleague, what ever happened to due diligence?
When I applied for my own mortgage several years ago, I was required to provide proof of employment, pay stubs to document my salary and information about my other outstanding debts, and had to be prepared to answer questions as the bank carefully reviewed my application. Was the process intrusive? Sure. Did it give the lender the necessary information to confirm that I would be able to pay the loan back? Undoubtedly. Was I ultimately more comfortable taking out the mortgage because I knew that an experienced professional banker had taken a thoughtful look at my financial situation and confirmed that I could afford to make the monthly payments? Absolutely.
The bank also required me to make a down payment on the house. That requirement gave me a powerful incentive to keep making my monthly mortgage payments because, if I defaulted on the loan, my down payment might well be lost. It also put a safety net under the value of my house, which has declined a little since the housing bubble burst. Due in part to my down payment, my home equity still exceeds the mortgage and I can weather the reduction in my house’s value until the market improves.
Various people are calling for new, tougher mortgage lending regulations to prevent anything like the subprime mortgage mess from “ever happening again.” I’d be more optimistic about the effectiveness of those new regulations if that strategy had worked better in the past. The savings and loan debacle of the 1980s led to tough new regulations … that didn’t prevent the Enron and Worldcom debacles. Enron and Worldcom led to tough new regulations … that didn’t prevent the subprime mortgage mess. (You see where I’m going with this.)
Congress certainly can pass new regulations to prevent the kind of slipshod lending practices that created the subprime mortgage debacle, and maybe it should. But I think it would be a lot simpler and more effective for lenders to follow existing due diligence rules, gather and verify needed financial information from applicants, and think carefully before issuing mortgages. Better due diligence might seem less profitable in the short term, but it will be necessary whether new regulations issue or not.
And even if new lending regulations issue, I promise you this: those shiny new regulations may prevent another subprime mortgage crisis, but they probably won’t prevent clever, greedy people from finding yet another way to get around the rules in search of a quick buck. Unless and until companies take responsibility to self-police and teach their employees the importance of ethics and due diligence, the next big financial disaster is only a decade or two away.
Topics: Business Ethics, Corporate Governance, Risk Management |