Preventing a New Housing Crisis

Brown_Highways_2012-01-22

2013-01-23 – Friday, the Consumer Financial Protection Bureau (CFPB) issued rules about risky mortgages that should go a long way in preventing a repeat of the 2008 housing crisis that continues in the form of foreclosures even today. I mention this because these rulings are huge, but seem to have been overshadowed by reporting on the inauguration. Or maybe there was some other reason the action was not reported.

The CFPB was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted early in President Obama’s first term. It was the brainchild of Prof. Elizabeth Warren and she was appointed as the head of the new agency. Senate Republicans blocked her confirmation, but she has now joined them as the junior senator from Massachusetts.

Meanwhile the CFPB took life without her presence, but not without her inspiration. Friday’s rule announcement is a major victory for consumer protection.

Starting January 1, 2014, mortgage brokers and loan officers cannot receive commissions based on terms of the loan. This means that these folks will no longer get paid extra for steering consumers into risky, high-fee loans, as happened in the run up to the housing market collapse.

The rule also prohibits mortgage brokers and loan officers from receiving “dual compensation.” That means that they will no longer be able to imply that they are “on your side” because you are paying them and then turn around and take payment from the lender as well. It will be one or the other.

Finally, loan originators are going to have to meet certain character and training requirements to get and maintain their jobs.

One of the mystifying things about the housing market collapse was the question: where did all the money go? We know that part of the money went as huge bonuses to financial company execs. Friday’s rule does nothing about that.

Another big part of the money went as commissions to the folks who “sold” loans that quickly went bad, resulting in foreclosures and huge losses. Nothing will stop unscrupulous mortgage brokers and loan officers. But these rules will certainly slow them down.

Some people are offended by this. Some people don’t want you to know.

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