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Caveat emptor

Regardless of new regulations in the ailing mortgage market, borrowers should learn to protect themselves.

August 11, 2007

As sub-prime mortgage casualties mount, presidential candidates, legislators and regulatory agencies are promoting reforms to help at-risk borrowers. Sen. Hillary Rodham Clinton (D-N.Y.) jumped on the bandwagon Tuesday, announcing in a campaign speech in Derry, N.H., that she would introduce legislation in September to "protect the American dream of home ownership" by "curbing mortgage abuses."

Politically, populist tough talk on mortgages is a no-brainer. Whether it is effective public policy is another matter.

The proposals share basic elements. Many, such as Clinton's and a bill sponsored by Sen. Charles E. Schumer (D-N.Y.), call for funding for credit counseling programs and restrictions on questionable loan practices, such as penalizing borrowers when they pay off loans ahead of schedule. The Federal Reserve and other regulators are seeking ways to make disclosures of loan terms clearer and to tighten the underwriting process, which assesses a borrower's ability to make loan payments.

Politicians also hope to establish accountability for mortgage brokers and lenders. Clinton wants to expand licensing for brokers; Schumer's bill goes further, establishing a fiduciary duty for lenders and brokers -- a requirement that a broker must put his client's interest ahead of his own.

These are reasonable ideas, but their success will depend on execution. Undoubtedly the current disclosure rules were intended to provide a clear picture of loan terms too. And government must find resources to enforce new regulations.

A cautionary tale: Fiduciary duty for brokers has been part of California common law since 1979, but that hasn't helped California borrowers, a record 17,408 of whom saw homes go into foreclosure in the second quarter of this year. Brokers and lenders are able to get away with neglecting their fiduciary responsibility because the state's Department of Real Estate does next to nothing to monitor their behavior.

Perhaps the proposed remedies will do a better job of protecting at-risk borrowers from abusive loan practices. But the best line of defense is consumers themselves. If they become savvy about mortgage risk -- what they can afford and what they can't, what's a good loan and what isn't -- shifty loan pushers will lose their power, no matter what political reforms do or don't make it into the books.

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