Confronted by record foreclosures, the Federal Reserve is ready to give homebuyers more protection from the types of shady lending practices that have contributed to the housing crisis.
Chairman Ben Bernanke and his central bank colleagues were expected to approve a plan today that would crack down on dubious lending practices that have hurt many of the riskiest “subprime” borrowers – people with tarnished credit histories or low incomes.
Consumer groups have complained that the new rules are not strong enough. Lenders worry they are too tough and could limit mortgage options for people and make it harder for some to obtain financing.
The new lending rules may not get a test for some time because there are fewer homebuyers these days, given all the problems in the housing and credit markets. Also, some of the shady practices – along with some lenders – have not survived the mortgage meltdown.
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“Clearly this is closing the barn door after the fact,” said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business. Yet, she said, “this is a very important move. It absolutely will make a difference going forward.”
Much will hinge on effective enforcement.
The plan would apply to new loans made by thousands of lenders, including banks and brokers. It would not cover current loans.
Those different lenders fall under a patchwork of regulators at the federal and state levels. So it will be up to each of these authorities to enforce the new provisions. “We have a very fragmented regulatory system. This will be a challenge to enforce. This will be daunting,” Wachter said.
The Mortgage Bankers Association had asked the Fed to act carefully. Overly broad rules “could prevent many lenders from making loans to those borrowers most in need of credit and significantly increase the costs of credit for all borrowers,” the association said in a filing with the Fed.
Under former Chairman Alan Greenspan, the Fed came under criticism for not acting earlier to address dubious lending. Some critics complained that Greenspan, who ran the Fed for 181/2 years, was not a forceful enough regulator, especially during the 2001-05 housing boom when easy credit spurred subprime home loans and many exotic new types of mortgages.
Bernanke, who took over the Fed in early 2006, also took heat for what critics believe was lax oversight.