Government Regulation of the Mortgage Industry
The residential mortgage industry has come under deep scrutiny after the market crash and recession that occurred in the United States from approximately 2007 through 2011. The causes of the market collapse however, started over a decade earlier. The development of new mortgage products and new methods in the way those mortgage products were invested, outpaced the regulatory standards the Federal government had previously established. Understanding the role of government previous to and post the mortgage industry collapse will be the focus of this market examination.
The mortgage industry is regulated by several government intuitions and regulations. The regulations are split between the protection of the consumer in lending decisions and the regulation of the bank in the lending practices. The agencies that regulate the industry are the FDIC, FTC, CFPB, and the OCC. These agencies regulate and give oversight to the industry. The laws or acts that regulate the industry are mainly the TILA, ECOA, RESPA, Regulation Z, and the Patriot Act. The department of justice enforces all mortgage industry laws.
The Original Market Failure
The market prosperity of the 1990’s brought new investors and capital into the mortgage industry. Investors were ager to find new vehicles for investment and the banking industry saw an opportunity to expand the lending programs that were available to the residential lending market. A mortgage was previously a 10,15, or thirty year fixed rate term. The minimum down payment was 5%to 15% on average between all lending arms. The banks proposed new investments based on variable rate mortgage such as 3/1 and 5/1 arms as well as lower down payments in some cases the financing was as high as 103% of the property. The qualifications of the borrower also changed in these programs. Borrowers debt ratios could be higher, meaning they could earn less and by more. Borrowers could have marginal to poor credit and still qualify based but at higher rates. These products were based on the assumption that the value of real estate in the US was on a permanent 5% appreciation. Even if a bank had to foreclose many assumed they would still see appreciation on the investment.
Mortgages traditionally are combined into large pools of securitized investments based on a set yield to the investors who want to bye into that pool. As the debt is repaid the interest and principle are distributed among the holders of the debt. When high-risk products were introduced into the market like products were not always combined in these pools. Investors were not always informed as to the risk that could be purchasing. When the economy slowed and mortgage defaults began to rise they affected all investors. As the default rate increased the value of the properties decreased. Now even the properties that were held by people who were paying their mortgage was significantly depreciated. Everyone began loosing money, the banks, the investors, and the mortgage holders.
Government Intervention and Policy Inacted
The Dodd-Frank Act was introduced after the market collapse. It amended and strengthened several mortgage laws (Sabel & Sherman&Sterlling LLP). The way consumers are disclosed information changed to be more understandable. The act also established stringent controls on the way properties were valued. The amount of fees charged on a mortgage was reduced. The Safe Act also brought individual accountability to the industry through the state and federal licensing of individual loan officers (Sabel & Sherman&Sterlling LLP). Previously, the mortgage industry had no loan officer-licensing program. These laws were all aimed at preventing future market issues.
Criticisms of the Regulations
The factor that must be remembered about a mortgage is that it is still a sold product. A loan officer takes an application chooses the rate based on the borrowers needs and their sensitivity to loan costs and the sells the scenario. The professional receives a commission of .05% to 1% of the loan amount depending on the organization. Selling a product does not put the customer in the best interest; it puts the seller in the best interest. The industry is not motivated to do the right thing it is interested in selling what it can get away with. A suggestion would be to take the per loan incentive away. Banks could still make as much in profit, but the amount paid in commission could go to hiring business accountants and finance professionals to counsel consumers and prepare their financing. Mortgages need to be offered and provided to the qualified. They should not be sold to the persuaded.

Sabel, B. K., & Sherman&sterlling Llp (2010, November 16). Mortgage Lending Practice after the Dodd-Frank Act. Retrieved March 18, 2013, from http://blogs.law.harvard.edu/corpgov/2010/11/16/mortgage-lending-practice-after-the-dodd-frank-act/