In his
recent post about Mortgage reform, Ontario GOP gives a reason why Randy Kuhl was right to vote against the
recent reform bill. GOP points out that the bill may end up punishing those with "decent but not perfect" credit, because the bill increases the amount of due diligence required by lenders.
I agree with GOP that borrowers are going to feel some hurt. As he points out, "lenders are already adding many more hurdles to the underwriting process than ever before". His observation mirrors my sense that, no matter what Congress does, the invisible hand is going to spank lenders who don't have perfect credit. The reason is the huge correction that's occurring in the financial markets.
Today's news that Freddie Mac lost $2 billion last quarter is just the latest indicator of a market in turmoil. One of the key mortgage-backed securities, collateralized debt obligations (CDOs), have been steadily downgraded. Citibank's CFO, whose company holds $43 billion in CDOs,
says his latest valuation of that paper is a only "reasonable stab". That's because the crisis isn't over, and more writedowns are coming. Amidst this turmoil, banks and other underwriters aren't eager to issue more mortgages.
Unless the requirements of the mortgage reform bill are completely out-of-control, it's unlikely that they'll be any stricter than the lending institutions that have been burned by the current lax environment. For the near future, banks are going to be extremely tight with the mortgage buck, for reasons that have nothing to do with Congress, and everything to do with the markets. That's unfortunate for lenders, but the invisible hand is behind this smackdown.