Dec. 18th, 2007 Federal Reserve Tries to Avert Future Sub-Primes Fiascos

Inevitably, when the government begins to try to fix something, it gets it not quite right. It's hard to tell what went awry here, since presumably, the Fed isn't subject to the political forces that dictate to Congress.
In the regulation put forth today, many aspects of lax and predatory lending are addressed. But the one that would have made the biggest difference is left out. Ultimately, the real sub-prime debacle hasn't hit yet but is imminent with rate increases. Instead of addressing that, the Fed addressed all of the problems that are the source of the spate of foreclosures already underway. Effectively, those would all have been averted by mortgage bankers simply following basic accounting principle, like verifying income and analyzing borrower's budgets before closing the deal. Since that is the obvious, easy stuff to solve, the Fed addressed that.
But the real problem is the bait and switch aspect of these loans. By offering low introductory rates, borrowers are lured by a false sense of affordability. What the lenders fail to do is walk the borrower through the "worst case scenario" possibility--what that payment will be should the rates adjust to their maximal level. That is anathema to all sales people, and borrowers who are in the sub-prime category are, by definition, not financially conservative or perhaps savvy.
The Fed paid lip service to this issue by attacking the advertisement of low introductory rates. But the problem resides in the guiding principles of the lender or lender's agent. Caring for a customer's eventual solvency is different from simply closing the deal. It requires adherence to a different set of values, one that treasures the delivery of truly sustainable loans over the immediacy of origination fees and mortgage commissions.