Fannie, Freddie, FHA, VA, HAMP and HARP are just a few examples of the government's influence on the current mortgage market. Add in the Federal Reserve's efforts to keep mortgage rates low and you have a mortgage market that is currently dominated by government influence. But is the U.S. mortgage market over-regulated or even perhaps under-regulated, and how do these regulations affect the cost and availability of mortgage loans? Does government influence make mortgages more expensive or harder for consumers to get? To find out, we asked Mark A. Lane, Ph.D., associate professor of real estate and finance at Old Dominion University, to offer his thoughts on the role of government regulation in the residential mortgage market.
Q: Is the mortgage market is over-regulated or is it under-regulated? How do these regulations affect the cost and availability of mortgage loans?
A: First, let me say that some level of regulation in the housing market is useful. However, it is important to strike a balance so that the amount of regulation doesn't place an unnecessary burden on the industry or distort market prices. A consistent challenge here is that lenders are typically much more financially sophisticated than borrowers. For most people, purchasing a single-family home is one of the largest purchases they will make during their lifetimes and, because they do it very infrequently, they are unlikely to become experts in this area.
Why government regulation is necessary
Since the average consumer is not as financially sophisticated as their lender, they will have a harder time understanding everything in the very large stack of documents that accompanies the typical mortgage. So this opens borrowers up to the possibility of being taken advantage of in a transaction. A lender taking advantage of a borrower is often referred to as “predatory lending.” The situation was so bad in the past that Congress enacted the “Home Ownership and Equity Protection Act (HOEPA)” in 1994 to combat some of the worst abuses.