Treasury Joins the Bandwagon to Regulate Mortgages Loans

Implications: The mortgage industry can expect significant new regulatory restrictions as a result of the subprime melt down. These regulations and possible legislation will govern the mortgage industry and MBS long after the current subprime situation is resolved.  Companies that might feel the pinch in include regulated lenders like Washington Mutual and Countrywide, investment banks like Merrill Lynch and Goldman, and home builders such as Toll Brothers and Bleazer and KB Homes.  The Admistration has to be careful not to over-regulate in this area or the long term consequences will be harmful to the economy and housing industry. 

Analysis: Beginning last year the banking regulators issued guidance to regulated banks and savings associations regarding low-doc and no-doc loans, teaser ARMS, and other practices deemed unsafe or predatory.  This was followed by additional guidance this year that has pushed regulated banks toward the prime customer.  The Federal Reserve is about to issue a new proposal that would affect all mortgage lenders, not just regulated banks.  The Fed is likely to impose a subjective standard on lenders, so that loans can only be made if the lender has a documented basis to believe that the borrower can repay.  Congress is also considering new legislation that would, in certain cases, impose liability on assignees.  If this passes, it will have a dramatic affect on the securitization of all mortgage loans.  Now the Treasury Department has joined the chorus regarding the need for new rules.  The Congress and the Administration must act carefully, or the mortgage industry will be saddled with new regulatory requirements that could have an adverse impact on housing and housing finance.