Will Tighter Lending Rules Matter?

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We often call the chairman of the Federal Reserve ‘Gentle Ben’ Bernanke, because that has been his approach so far to the subprime mortgage crisis: No table-thumping, no finger-wagging, no jawboning -- just gentle prodding of lenders to be more careful in the future.

The Fed and other regulators issued new guidelines Friday advising -- but not requiring -- some lenders to fully consider whether subprime borrowers can afford their mortgage payments after the cheap ‘teaser’ rates expire.

The guidelines do not apply to independent, state-regulated lenders, but are still expected to have some impact. The New York Times: ‘The rules are likely to make it harder for some borrowers to qualify for loans, although many lenders have been tightening their standards in response to rising levels of foreclosures and mortgage delinquencies.’

The Fed could have thrown its weight around, but chose not to, as Floyd Norris points out: ‘The Federal Reserve chose not to use the authority it has under a 1994 law to impose the rules on all mortgage lenders, said Michael D. Calhoun, president of the Center for Responsible Lending.’

The problem, as we see it, is that the Fed waited so long that it can’t really throw its weight around. Much tougher lending standards now would probably drive housing prices lower, which would leave even greater numbers of recent home-buyers upside-down, which would lead to more foreclosures, which would scare Wall Street investors away from mortgage-backed securities, which would tighten credit even further, and on and on. The Fed is stuck at this point, wishing and hoping that the mortgage mess doesn’t get worse.

Photo Credit: Reuters