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Paul Kiesel
Paul Kiesel
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Fed is Convinced Mortgage Crisis will Spill into Next Year

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Ben Bernanke, Chairman of the Federal Reserve, said Tuesday morning that new lending rules would be put into effect next week to restrict exotic mortgages and to help curb other dubious lending practices in an effort to protect future homebuyers.

In regards to the current state of financial markets, Mr Bernanke said, “The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning [. . .] It is not too soon, however, to begin to think about the steps we might take to reduce the incidence and severity of future crises,” (The New York Times, 7/8/08).

Bernanke is correct in his latter statement; the Fed needs to take the proper steps in order to reduce the incidence of what took place during the subprime boom from happening again, however, in regards to his acknowledgement of the ongoing mortgage crisis, something needs to be down now, in order to help stave off even further market damage/losses. Congress has been unable to pass a housing bill or relief plan for troubled homeowners and the Fed has done little to aid the mortgage crisis, with the exception of endorsing programs like Hope Now, which has provided minute help to people in troubled or fraudulent loans.

However, and fortunately, the Fed is beginning to see that the end is nowhere in sight per the mortgage crisis. In fact, the Fed, and Bernanke through his comments today, seem to suggest that the crisis that has plagued financial markets for the last year will likely spill into next year and grow worse as we finish the year.

This becomes even more apparent through the Fed’s announcement today that it will extend a lending program (government loans to Wall Street) that was set up for investment banks and was originally set to last for only six months. The extension of this program will go well into next year or at least for another six months. (This lending program is the same one that helped facilitate JP Morgan Chase’s acquisition of Bear Stearns in March.) Now the Fed needs to come up with a better plan to help homeowners, too. Hope Now, as Treasury Secretary Paulson suggested back in May, is “proving insufficient.”

New Mortgage Rules

Next Monday, we’ll find out what new mortgage rules will go into effect before the end of the month. Based on what Bernanke alluded to today, the new rules will apply to all lenders and not just banks and will only apply to new mortgages not existing ones. Ultimately, the new rules next week could bring about some optimism for consumers as the proposals that have been discussed since December, and that were reiterated today, would do away with most of Newt Gingrich’s Home Ownership Equity Protection Act of 1994, which covered less than 1 percent of all mortgages since HOEPA became law (in fact HOEPA helped usher in deregulation of the lending industry amid other industries, along with kickstarting the subprime boom).

Industry lobbyists are complaining loudly about Bernanke’s comments today, and that’s good news for mostly everybody else.