The Fed has proposed a Plan To Curb Risky Lending which does not much for the past victims of predatory lending practices and appears to do not that much to prevent future abuse:
The plan includes provisions that would require more extensive disclosures, restrict advertising and make it harder to lend to borrowers with little or no documentation and a questionable ability to repay. It would also allow borrowers, in some circumstances, to sue lenders who violate the rules.
As a lawyer, I love that last line. What it really means is that in most circumstances the victims will be unable to sue for violations of the rules. But, I digress.
I’m well aware that simple solutions to complex problems are usually flawed. Nonetheless, in this case, I think there’s a simple solution that will be more effective than any disclosure requirements could possibly be. This is not to say that the sleazy kickbacks, etc., should not be outlawed. But if you really want to stop this stuff, you make sure that the loss falls on the people who cause the problem. Most of these subprime loans were retained by the original lenders for periods of time that could easily be counted in nanoseconds. They had every incentive to lend, and no incentive to care about future defaults. Nothing in the above proposals changes that. My suggestion: no mortgage secured by residential real estate can be transferred, conveyed, securitized, etc. for a period of five years from closing. If such a transfer takes place, the mortgage and underlying obligation becomes null and void.
I’m sure that the people who brought us this world wide economic disaster could tell us why this would be a terrible idea, inasmuch as it would deprive people like them of the chance to make a lot of money off of other people’s misfortunes. I’m sure it would be mocked as at attempt to roll back the clock and that it would stifle creative financing and cut off some people from the American dream of homeownership (followed by home-losership). But I’m willing to bet it would result in lenders being a lot more prudent about the loans they make, almost as if they were lending out their own money.
This proposal, by the way, has the virtue of being self enforcing. Despite what Alan Greenspan now says, the Fed could have got out in front on this issue. It didn’t want to, and it won’t want to on some future date when it is once again run by the disciples of Ayn Rand.
Post a Comment