The government, purveyor of laws, rules and regulations, has decided that the credit crunch could be greatly helped by some new laws, rules and regulations, believe it or not. Obviously the powers-that-be take great pleasure in showing that they care and are willing to create these new edicts to prove that very fact. That also was the motivation behind the last group of laws, rules and regulations—which didn’t actually work. This doesn’t mean that either the new ones will work or that any attempt was made to make the old ones work. Freely translated, it means that the government is great at producing laws, rules and regulations, but not great in their enforcement.
Let us take a look at what is happening. Ben Bernanke, The Chairman of the Federal Reserve, has proposed some new(?) ideas to calm the nerves of the participants in the credit markets, namely the lenders, investors, brokers, borrowers and of course the Federal Reserve. These new rules include eliminating stated income/stated assets loans, misleading advertisements, loans without escrows for taxes and insurance, and prepayment penalties on loans that reset their interest rate in less than three years. Although Bernanke didn’t state that this was the definite answer to the problem, he did give us the feeling the end of the problems will be near thanks to this piece of work. Unfortunately he is also a politician and so to be fair, to all he will phase the program into the mortgage market in October. Before you get too excited or depressed, that would be October 2009.
I am sure that Ben Bernanke knows that the lenders have all the tools they need to do the loans according to Hoyle, or in this case according to Bernanke. If they decide to do a stated loan, they usually have the borrower sign a release form that allows the lender to pull the tax return or the pertinent figures from the tax returns to see if the stated income figure is correct. They have always had this form and could have used it at any time in the past few years when all the craziness took place. They simply chose not to do it.
The lenders had many ways to check the value of the property from running the address through numerous automated value modules to having a desk review by the underwriter or a field review by a review appraiser. This has always been available but the lenders didn’t always choose to use these resources. In as much as every loan has a credit report on the borrower (s) which goes to every lender, they could have taken more than a cursory look at and probably learned more about the borrower than they even needed to know. They simply choose not to take advantage of this report.