Effective Financial Regulations Could Prevent Rerun of Foreclosure Crisis
June 30th, 2009
Many experts are of the opinion that only effective financial regulations could prevent a rerun of the foreclosure crisis.
Recently the Obama administration has come forward with a plan to replace anachronistic federal banking regulators with one body. Basically it will involve the combining of two offices – Comptroller of the Currency and Thrift Supervision. Regular risk control and resolving of insolvent institutions would be given to other entities. The latter currently supervise banks. These are Federal Reserve and FDIC. Many in the Congress have already started to growl against it. The opponents are those with vested interest and the agencies concerned.
Banking regulation is something much more comprehensive and then merely regulating mortgage markets. What is important is to pinpoint this market-by-market. By following these principles the federal regulation will become stronger with more shock-absorbing powers.
The first principle is to recognize that costs of not being able to control mortgage markets are huge. This is obvious to all. For the last thirty years there has been an ensuing debate about enforcing more strong regulations. On the one hand there was the need for protecting consumers while on the other strong arguments were placed against restricting lenders. The latter always won the day. During the last decade this argument became even stronger with suggestions that even medium constraints would harm society. Some said stronger restrictions would not be able to bring down sub-prime lending. The majority however are of the view that restricting this menace of sub-prime would be more beneficial for ordinary Americans.
Entire neighbourhoods together with individual person have been battered because of thoughtless lending. Being able to avail of solid accountable mortgages is for the good of the public. Breakdowns like the one recently happened can cause irreparable harm to many who have not done anything wrong. Protection of the consumer is of primary importance. Thinking only about the welfare of borrowers and lenders does not cover entire society; it ultimately leads to nothing. The broad section of society is affected by falling property values and the curse of vacant buildings.
There is an erroneous notion based on theory and not reality that relying solely on detailed statement of loan terms will help the borrowers in availing of the best loans. The reasoning in this case is fallacious because it confuses information with knowledge. It presupposes that borrowers will all behave rationally and take the best decisions often by reducing the many options into one or two alternatives. But the area the borrower wades in is murky and risky.
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July 22nd, 2009 at 9:07 am
[...] have formed a group to probe strategies to ward off foreclosures. Michael Wasylick of Florida Foreclosure Defense Bar Association said, “Some people give up [...]