Loan Modification

Would One Mortgage Regulator Work?

By Frank Shump

The housing crisis has caused a re-evaluation of the current system on a number of fronts, from how mortgages are serviced to lending to the government?s role in financial markets. One area in particular that?s come under intense scrutiny of late is financial regulation, and Uncle Sam has launched a number of efforts to overhaul the regulation of the financial system. With ?panels? and ?bipartisan commissions? being appointed at an increasing pace, does it make sense to have one regulator that oversees the efforts?

A number of government organizations have recently become involved in the mortgage markets, for example, including the FBI. Congress recently passed legislation that intends to create a wider number of FBI mortgage fraud task forces and close loopholes that prevented prosecutors from going after businesses and individuals for fraud and/or money laundering charges.

This action will likely be welcome by consumers and politicians alike, as I can?t seem to go 10 minutes or so without reading about a new mortgage fraud scam. Swindlers are moving fast, too, with a great number of fraudulent organizations offering to ?fix? struggling homeowners mortgage problems. As with most scams, a fee is asked to be paid up front, and nothing is ever done in return. This is certainly a scourge that needs to be dealt with. A new regulatory agency could help fight this problem, but it appears it would have plenty of other areas on its plate as well.

This new regulatory organization would have a much broader range of authority. Its intent would be to protect consumers who use?well just about any type of financial product. These would include mortgages, credit cards, and mutual funds. The idea is that in doing so, the organization would combat one of the causes of the crisis itself, predatory mortgage lending (and as some commenters have pointed out, borrowing!).

The negotiations for creating such an entity continue, but there are some thorny issues involved as well. Industry groups worry that more stringent regulation would limit the availability of financial products to consumers, which could be problematic at a time when it is still very difficult to borrow. Don?t expect currently existing regulators to take this idea lying down either. Banking regulators and the SEC, for example, would almost certainly lose power here, and funding could be cut. Of course given their track record, maybe that isn?t such a bad thing. The Harvard University law professor who originally came up with the idea, however, said that given the far-reaching danger of financial products to the average consumer, a more stringent and powerful far reaching government entity should be in place. Here are some of her words on the subject:

?”It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?”

Why indeed.

Full post as published by Blown Mortgage on May 21, 2009 (boomark / email).