Philadelphia Weekly

REAL ESTATE

Borrower protections face rocky road

Preventing another crisis

By Inman News Feed

Add Comment | Comments: 0 | Posted May. 17, 2010

Preventing another crisis

Jack Guttentag
Inman News

See related articles:
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2. 'Wind-down': a bailout alternative

3. The failure of 'too big to fail'

4. Protect financial future with larger reserves

5. 3 ways Danish mortgage market trumps U.S.

6. Why we need a new private secondary market

Much the best way to protect consumers in the home loan market is to simplify the structure of the market so that borrowers have direct access to the information they need without government intervention.

This could be done by creating direct links between the primary market where loans are originated and the secondary market where they are priced.

I noted in a previous article in this series that borrowers in Denmark can borrow at a rate equal to the current yield on the secondary market price of their loan, which they can easily find online, plus a standard 0.5 percent markup.

This leaves only upfront lender fees to be negotiated on a case-by-case basis, and these are set competitively because borrowers are fully capable of distinguishing higher fees from lower fees. There is no required Truth in Lending or Good Faith Estimate documents because none are needed.

Another important simplification would be to require that all third-party services required by lenders, such as title insurance and appraisals, be purchased by lenders, with the cost included in lender fees.

This would eliminate multiple costs and transactions that needlessly confuse borrowers while reducing the cost of these services. In contrast to borrowers, lenders are knowledgeable purchasers and can purchase in quantity.

In Denmark, third-party costs associated with mortgages are inconsequential. The Danish government guarantees the accuracy of title registration records, making private title insurance unnecessary. Costs of appraisals and registration fees are borne by lenders and passed on to borrowers in lender fees, which is how it ought to be done here.

But I don't fool myself into believing that these badly needed changes will be enacted. Legislation covering mortgages is lobbied mainly by the mortgage banking industry and the consumer groups, and while they differ on many issues, neither would support the reforms described above.

The mortgage bankers wouldn't support them because they would reduce the profitability of mortgage banking, and the consumer groups wouldn't support them because they would reduce or eliminate the need for consumer groups.

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