The past five years have been turbulent financial times, especially for people who purchased real estate between 2005 and 2008. The main factor that caused these real estate buyers to get into trouble was simply market euphoria that sent house prices skyrocketing, only to fall back down to earth a few years later. But that left millions of people with large mortgage loan balances and monthly mortgage payments that they cannot afford. And who is to blame? For one, the state attorney generals (AGs) have opined that a large portion of the blame should be allocated to national mortgage lending banks. But are they really to sole reason for the housing disaster?
The answer at first is unclear. Many politicians also blame the banks, but then the banks blame the politicians that required them to loosen their mortgage lending standards as noted in this Wall Street Journal article. Other people blame their mortgage lenders for unfair loans and shady lending practices as noted in The Fiscal Times article, while others feel that it is the fault of the homebuyers for taking out a mortgage they couldn’t afford on a house they should have never bought.
But the truth is probably that all those groups are somewhat culpable and should all take some responsibility. However, the state attorneys generals seem to believe that the majority of the blame should be borne by the major mortgage lending banks. As such, the AGs have negotiated with them and extracted a large financial settlement from those banks. This settlement, if finalized, will require Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial to pay about $25 billion in total. Some of the money would be to reduce loan principal balances, some would be used to give checks to homeowners who were allegedly deceived about their loans, and some would be used to reduce the loan interest rates, according to the Sun Sentinel.
And major mortgage lenders will be subjected to more government regulations, some of which will hopefully better protect the borrowing consumer and the taxpayers. There is a cost though to more regulation. Some additional regulation is good, some is not so good for consumers. For example, the cost of appraisals has roughly doubled in the past few years due to new regulations; and the reasoning behind those regulations seems sound and financially prudent to better value collateral that supports a mortgage loan. However, since every time a new regulation, rule, lawsuit settlement, etc. is added, it adds costs to the mortgage lending banks operations and you ultimately pay the price when you go to borrow money years from now. This is something to consider when you hear about these settlements and think the banks are finally getting what they are due.
So that is the drawback that everyone reading this article will experience in the future: higher costs and higher interest rates for financing a home due to additional regulations on the industry. The costs of appraisals, underwriting, loan processing, etc. have all gone up. And when banks have to pay out large settlements that cost them more, that just means they will have to raise fees on you to recuperate losses from those past higher expenses. It may not be an exorbitant amount, but it will raise the cost of your home or your ability to buy a home in the future.
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