Did Mortgage Reform Miss the Mark?

This article first appeared at ScotsmanGuide:

The mortgage crisis sparked numerous regulatory changes that addressed actual and perceived causes of the crisis. The effectiveness of these changes varied widely. Some have helped, while others actually hurt lending. We have not seen reforms to one part of the system, however — reforms that actually would have prevented the crisis. All attempts to hit that particular target have failed.

One early reform that missed the mark was the Home Valuation Code of Conduct, or HVCC, which sought, in part, to stop appraisers from colluding with homebuilders and their affiliated mortgage banks. Such fraudulent appraisals were used in some cases to close sales of subdivision homes at inflated prices during the final stage of the real estate bubble. Although addressing a legitimate problem, HVCC had several negative side effects, including increasing costs, decreasing portability and lowering quality, because appraisals are awarded to low bidders.

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Many reforms were directed at restricting or eliminating mortgage programs or options that were demonized as causing the crisis. These included subprime loans, negative amortization mortgages, low- and no-doc loans, and interest-only products. None of these are inherently dangerous. They only created problems when given to inappropriate borrowers.

With broad-brush reform essentially eliminating these so-called “dangerous” loans, millions of qualified borrowers were shut out of the mortgage market, and millions of existing borrowers were deprived of the ability to refinance and take advantage of lower interest rates. In addition, cutting millions of would-be borrowers out of the market during the recovery unnecessarily exacerbated the drop in real estate prices by reducing demand. More finely-tuned reforms could have retained the programs and/or options for appropriate borrowers.

Con’t Reading at SG