How Nice: CFPB to Overhaul the Mortgage Industry

Posted: Apr 10, 2012 10:59 AM

The Consumer Financial Protection Bureau is making big plans to reform the mortgage industry in the next couple of years, which is just super-duper, because government interference in the housing market worked out so well before. But, don't worry -- it's for your own good.

If there were some sort of selfessly disinterested, dispassionate, all-knowing, benevolent body that possessed all of the relevant information and could regulate the mortgage industry with perfect foresight while imposing zero costs or burdens on society, then I'd say, go for it. But the federal government fits into precisely none of those parameters. The government is a very self-interested, politically ambitious, and costly entity, and can't hold a candle to the efficient and impartial regulatory framework of free-market competition.

So, when the government tells you that they're here to protect you from the big bad mortgage companies, it should be cause for dismay -- not the relief that they want to coddle you into feeling:

“For too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress," said CFPB Director Richard Cordray. "It’s time to put the ‘service’ back in mortgage servicing.” ...

The new effort represents one of the broadest projects taken on so far by the new bureau, which opened its doors in July after being created by the Dodd-Frank financial reform law. It also targets one of the more problematic areas under its jurisdiction. ...

Now, the CFPB is planning to propose a set of rules aimed at making that business more transparent and holding servicers more accountable for their actions.

Under the CFPB's proposal, if a homeowner gets behind on their mortgage and is facing foreclosure, the servicer would be required to make a "good faith" effort to contact the borrower and explain the foreclosure process, as well as provide counseling options.

The CFPB is also considering requiring servicers to have staff dedicated to working with struggling borrowers either facing foreclosure or trying to avoid it. These employees would have easy access to the borrower's records, as well as the ability to determine if a loan modification could be pursued to avoid foreclosure. A common complaint by struggling borrowers was their inability to discuss their plight with an employee with their servicer. ...

Servicers would also have to immediately credit payments received from borrowers, and provide warnings to homeowners before interest rates changed on adjustable-rate mortgages. Monthly mortgage statements would have to be made clear for homeowners, so they can easily understand the terms of the mortgage, where their payments are going, as well as any fees they might be paying.

The CFPB was created as a part of Dodd-Frank, the harbinger of the federal government's larger financial central-planning agenda, and the Obama administration is using the new agency to sustain the narrative that big business malpractice, instead of big government interference, was more responsible for the financial crisis. Which is false. It's easy to swoop in and claim that you have all of the answers to solving everybody's problems, but the government is notoriously poor at examining the possible neighborhood effects of their policies. Sure, the CFPB can force companies to hire more staff to more thoroughly "explain" contracts to consumers and to make immediate credits and whatnot, but there are costs to these requirements -- costs that will inevitably be passed along to the consumer.

Always be wary of government agencies purporting to have no other purpose than to "help" you, because really, they just want to help themselves -- like any other rationally self-interested entity, except that they have to power to enforce their interests through fiat, instead of through free-market survival -- and these insidious little micro-takeovers are the type of thing that build up into macro-takeovers.