Legislating Away Subprime: California Spotlight
Filed under: Mortgage Industry Legislation, Subprime Crash — admin @ 2:01 pm
Regulators and legislators are scrambling to prove their value in an election year. Following the federal response with the Housing and Economic Recovery Act of 2008, state legislatures are clamoring to offer their own resolution to the local crisis. With most information coming from consumer groups and the media, the initial proposal to “cure” subprime is often diluted in the reality of the mortgage market.
Can you legislate subprime away?
There are many that make the argument that subprime is bad: the empirical evidence of our current economic situation shows that they are destructive, unaffordable, vulnerable to abuse, costly and predatory by nature. While subprime can be abusive in the wrong hands, it is scary to effectively eliminate an entire channel of lending based on what can go wrong and entirely ignore a market that still show that there is a need. The average FICO score in the country is 694…and subprime borrowers average over 100 points less. FHA and Agency product has responded with ever stricter FICO, income and down payment requirements. With unemployment and a declining economy, the number of subprime borrowers that walk the line between FHA and Agency loans is growing.
In California, the epicenter of “creative” subprime, legislators have been trying since the beginning of the year to hammer out a legislative response to the subprime crisis. Hoping to the head-off similar problems in the future, they face the same issues of competing interests – wanting to protect the consumer while still containing the liquidity crisis and keeping small business afloat. But at the end of the day, they removed many of the contentious stipulations, to include a proscription of YSP and a requirement to require proof that the borrower can afford the payments, piggy backing on the requirements outlined in the federal legislation. At the very least, they will be able to argue that they put something on the books.
Why they fail…
To consumer groups it seems very straight-forward…get rid of YSP, get rid of brokers…voila, problem contained. Unfortunately, that isn’t as simple as it seems. Most subprime loans (those few still available) are 1. Not something a banker wants to put on their warehouse line – so they broker and 2. not originated “in the branch” of any major depository institution in the country any longer. If you remove the financial incentive for originators to offer these loans to difficult borrowers, well, the result will be a natural liquidity problem.
Stumble it!