According to a study by economists at the International Monetary Fund (IMF), stricter regulation of lending by non-bank mortgage originators could have prevented the housing bust[1]. The authors of the study, Jihad Dagher and Ning Fu, both analysts for the fund, say that their studies show that “independent, non-bank lending increased in nearly all counties across the United States during the boom years.” They believe that these independents are “a strong predictor of the early rise in foreclosure” and also showed in advance that there would be a “contraction in credit, decrease in housing prices and rise in unemployment.” They believe that stricter regulation of these independent lenders would have prevented much of the tumult of the past few years.
The authors emphasized, however, that these findings do not absolve banks from their share in the blame for the real estate, mortgage and credit crises. However, they do believe that non-bank lenders like Ameriquest, New Century and WMC Mortgage probably “contributed disproportionately to the credit bubble”[2]. The paper suggests that “weak or poorly enforced regulation of non-bank originators combined with perverse financial incentives for originating and selling bad loans…fueled the mortgage boom and bust.” IMF has stated that the paper does not reflect the fund’s views.
Do you think that non-bank lenders played a major role in the housing bust?
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[1] http://www.dsnews.com/articles/study-links-lightly-regulated-lending-to-foreclosures-unemployment-2011-09-19
[2] http://blogs.wsj.com/developments/2011/09/16/paper-lightly-regulated-lenders-made-riskiest-mortgages/?mod=google_news_blog
What a ridiculous conclusion! “independent, non-bank lending increased in nearly all counties across the United States during the boom years.” due to the fact that the rating agencies and the large institutional lenders were creating subprime programs that were not rated properly for their risk levels. If these were rated properly, you would not have seen the influx of risky loans. Had credit standards been properly scrutinized and LTV’s limited according to risk, the fallout would have been much worse.
The attempt to attach blame is part of the modus operandi of the elite seeking power. This is another attempt to place blame for more than one reason. First to take it off the shoulders of the banks and two to have a new reason for more regulation. They fail to see that some of the regulation was in part to blame for the mess. When the checks and balances are made less effective, the distortion takes hold. I could go on forever, but this is a combination of many things, not just bad lending. Lenders relied upon appraisals and the appraisers did the job as it was mandated by other regulations. Personal credit scores did not reflect the character of the person, just their immediate history. That could be manipulated and it was. Ratings of the debt instruments were also fatally flawed. This, I see as the biggest flaw. This was a fraud upon the investors. Investors were told that they had decent paper, when in fact, they had seriously questionable paper with hedges and mortgage insurance (some lender paid and funded) that could not even begin to absorb the true risk.
Banks should not be coddled in this case. Nor should they be granted privilege. Their rules for lending should be no less strict than any other.
Most importantly, do not remove the lending ability from the little private guys and non-bank companies. Banks need competition (though it should be a simple APR that is the measure). Removing competition from any market can ONLY result in a bad outcome. If you try to limit competition, there will be a black market in lending. Just ask a knee breaker….
Take everyone at the top in the banks, congress, legal system, FDA, CDC, etc and put them all in one big chain-gang on a deserted island. The last one surviving gets a gold star on their forehead. All problems solved.