Two numbers summarize US consumer protection policies for financial products: 1) The SEC is considering a modification of a rule so that hedge funds cannot sell their high-risk investment devices to 98.7% of all Americans. 2) An estimated one in five recent subprime home mortgage borrowers will lose their homes. There it is: When you might lose your investment in stocks, the SEC imposes suitability rules that prevent brokers from selling high-risk products to all but the most sophisticated investors. But when you could lose your home in a refinancing, federal regulatory agencies have largely left consumer to the wolves.
Investors get protection because the government decided a long time ago that there would be more confidence in the market if the repeat players (the brokers) bore some obligations to their customers not to steer them to high risk investments. Over time, the market has evidently agreed and regulations to protect consumer investors have been strengthened. But high risk mortgages reflect the opposite mindset. The home is the largest single investment the typical middle class family will ever make, but it’s “buyer beware” in the subprime mortgage market.
Who cares if one in five subprime borrowers lose their home? The family cares, of course, because they lose everything they invested and many will end up with deficiency judgments that they can never pay off. CRL estimates that these families will forfeit $164 billion in home equity as these loans are foreclosed. Their neighbors care, because foreclosures depress everyone’s home values. People who worry about racial inequality care because subprime loans are disproportionately sold to African-American and Hispanic borrowers, with the result that all their accumulated financial gains will be wiped out. Anyone with a job in the construction industry cares because foreclosures depress new housing construction. And all of us who have jobs that depend on a robust consumer economy care because of the potentail fallout from a housing market crash.
Should mortgage brokers have similar responsibilities to evaluate suitability as stock brokers? It isn’t a complete solution, but it would go a long way toward ending the practices by which mortgage brokers steer clients to mortgage products that they know the customers are unlikely to be able to repay. If stock brokers must help investors with $100,000 to invest in the stock market avoid certain risks, should mortgage brokers be required to do the same for those borrowing $100,000 to buy a home?
