Among all the mistakes that have led to the current real estate wreck, it now seems clear that lax government regulation should be at the top of the list. Ivory-tower economists may tout the undeniable theoretical benefits of unfettered markets, but those benefits clearly depend on the health of the entire system. When regulation backs off to the point of systemic failure, free-market enthusiasts have gone too far.
Here are seven areas in which inadequate government control or oversight contributed to the current real estate crash:
Negative amortization. Negative amortization isn’t new, but during the recent housing boom lenders used this dicey financial mechanism to create much more complicated mortgage products, oftentimes with clever names like "pick a payment" mortgage. Negative amortization is problematic because it forces or encourages borrowers to increase the amount of money they owe over time, rather than repay their debt. Inadequate disclosure and lack of understanding about negative amortization left borrowers in the lurch. Too many of them didn’t know or care how their loan worked, and the results of their ignorance, whether inadvertent or willful, have been catastrophic.
Mortgage disclosures. Home buyers and homeowners who want to refinance their mortgage are confronted by a huge pile of paperwork that’s required by law or industry custom. Granted, each individual document may be important, but collectively all this paperwork destroys any chance the borrower might have to understand what any of it means. Important information about the terms and costs of the loan is buried in an incomprehensible last-minute flurry of paper and is thus hidden from the borrower, who has little opportunity to read the documents much less question their content. This one-sided system, which has been aided and abetted by ineffective regulation, gives lenders easy opportunities for mischief at borrowers’ expense.
Good-faith estimates. An estimate of a cost should be reasonably related to the actual final cost because otherwise the "estimate" is pointless and can’t be relied on for its purported purpose. Yet the federal government has allowed lenders to give borrowers "estimates" of closing costs that have no discernable relationship to the actual fees they were charged. A lack of proper oversight opens the door to price gouging and allows lenders to hold borrowers’ loans hostage until they agree to pay whatever fees the lender wants to charge in addition to the "estimate" of costs the borrower expected to pay.
Appraisals. The federal government set up an elaborate system of model state-level laws to license and regulate real estate appraisers in the aftermath of the savings-and-loan crisis. But appraisers are still too often told to "hit the number" or risk being struck from the list of those who will be hired to do the work. The original regulations may have been sound, but regulators failed to update the rules to close inevitable loopholes, fix problematic glitches and take into account newer practices that skirt the intention of the law.
Kickbacks. The federal Real Estate Settlement Procedures Act (RESPA) originally banned kickbacks in connection with real estate settlement services, but was later amended to permit affiliated business relationships, which effectively entrench the very practices that were supposed to be banned. RESPA today sanctions kickback schemes among "affiliated" realty and settlement service firms. The fact that RESPA may be largely unenforceable doesn’t excuse the government’s abdication of its responsibility to protect realty consumers from the hidden costs of kickbacks.
Government-sponsored entities. The concept of enterprises that were neither government agencies nor public corporations answerable to the U.S. Securities and Exchange Commission should have raised many more regulators’ eyebrows long before the federal government was forced to take over Fannie Mae and Freddie Mac. The obscure Office of Federal Housing Enterprise Oversight (OFHEO) didn’t have nearly enough manpower, money or authority to control these gigantic corporations. Their exemptions from SEC regulations were deeply problematic as well.
Licensure. State licensing laws should protect the public from incompetent practitioners in any field for which a license is required, and the fact that an individual holds a license should assure consumers that they can expect competent service from the professional who has obtained the license. Yet too many states handed out real estate salespersons’ licenses to people who had no qualifications or training to do their jobs. The result was a boom in unqualified real estate licensees, many of whom are now on their way out of the business.
Copyright 2008 Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author. Reprinted by permission of the copyright holder.
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