Mortgage industry associations call for change

Industry groups are anxious to put forth a good public face promoting reform within our industry. The more they appear to be doing (or actually doing, lest I be less cynical) the lower the risk for excessive regulatory action being handed down from the government. It has been said "Any industry is far better of self-regulating rather than letting the government regulate for you."

With that, many of the industry trade groups released a statement yesterday supporting the following reforms (h/t Matt @ OC Register):

"Lenders should only make home loans to consumers with subprime credit whom they reasonably believe have the ability to repay the loans based on information available at the time the loan is made."

"Loan terms, features, benefits and risks should be clearly disclosed to consumers in ways that enable them to make an educated decision about the loan product that they choose. The timing and estimated amounts of future payment changes should be clearly communicated to consumers in accordance with applicable disclosure laws and good business practices."

"Regulators, loan servicers and investors should work together to make available to homeowners appropriate options to help them sustain homeownership."

While much of this sounds like what WE ALL SHOULD BE DOING EVERYDAY there are a few interesting thoughts that could arise out of some type of change based on this talk. (If there is no change and only talk the government and Barney Frank will be happy to hand down plenty of change.)

Possible good things that could come of this:

Simplified disclosures. This industry would be a whole lot better with a "Paperwork Reduction Act" similar to what the government does. Slim down the forms, the number of forms and put some easier language in to the disclosures.
Repayment ability analysis. Perhaps we will get away from the 55% DTI stated income loans on teaser 2/28 mortgage rates. This would go a long way towards reducing the current foreclosure problem.
Revision of current servicing rules. For all of the talk about loan modification and for lenders helping homeowners keep their homes with alterations to the loan terms there are still problems with it. The biggest one that I see is that most servicers will not talk loan modification until the loan has become delinquent. This means that homeowners who want to be proactive about the situation have to sit on their hands and watch their future credit go down the tubes before they can talk about loan modifications. Lender’s should have a modification qualification process that lets people with certain (underwriting) criteria apply for loan modifications before they become delinquent.

Possible bad things that can come out of this:

Lots of talk, no action. If we end up where we started from this will make the industry look far worse than it currently does. If we are just trying to dog-and-pony our way around additional regulation I hope it doesn’t work.
Restriction of credit. Obviously, credit NEEDS to be restricted, but the market has a tendency to over-react and I hope that it doesn’t unnecessarily shut out people that would be good homeowners just because of a broad-brush underwriting guideline revision.
Crippling legislation. Sarbanes-Oxley anyone?