Though it is obvious that the problem is mortgage bankers playing fast and loose (at least that is my impression, particularly after reading this piece in Mother Jones last month: http://www.motherjones.com/news/feature/2006/09/prime_suspect.html The stuff about the appraisers being in cahoots with the bankers so that they can bid up the price of the house and give people not only a loan they can't afford but a loan they can't afford for an amount that is something like twice to three times the real value of the house. Sick.) by using predatory lending, the GAO doesn't recommend that there be any regulatory reeling in: they want to have a handout that informs the buyers of the risks "and benefits" of Alternative Mortgage Products (AMPs).
http://www.gao.gov/new.items/d061021.pdf
summary page here: http://www.gao.gov/highlights/d061021high.pdf
The problem, for the GAO, of course, isn't that financers are screwing people over, but that "the growing use of these products, especially by less informed, affluent, and creditworthy borrowers, raises concerns about borrowers' ability to sustain their monthly mortgage payments" (50), which might cause "increased delinquencies or foreclosures for borrowers" which would mean "losses for banks and other lenders:"
"From 2003 through 2005, AMP originations, comprising mostly interest-only and payment-option adjustable-rate mortgages, grew from less than 10 percent of residential mortgage originations to about 30 percent. They were highly concentrated on the East and West Coasts, especially in California. Federally and state-regulated banks and independent mortgage lenders brokers market AMPs, which have been used for years as a financial management tool by wealthy and financially sophisticated borrowers. In recent years, however, AMPs have been marketed as an "affordability" product to allow borrowers to purchase homes they otherwise might not able to afford with a conventional fixed-rate mortgage.
Because AMP borrowers can defer repayment of principal, and sometimes part of the interest, for several years, they may eventually face payment increases large enough to be described as "payment shock." Mortgage statistics show that lenders offered AMPs to less creditworthy and less wealthy borrowers than in the past. Some of these recent borrowers may have more difficulty refinancing or selling their homes to avoid higher monthly payments, particularly if interest rates have risen or if the equity their homes fell because they were making only minimum monthly payments or home values did not increase. As a result, delinquencies and defaults could rise. Officials from the federal banking regulators stated that most banks appeared to be managing their credit risk by diversifying their portfolios or through loan sales or securitizations. However, because the monthly payments for most AMPs originated between 2003 and 2005 have not reset to cover both interest and principal, it is too soon to tell to what extent payment shocks would result in increased delinquencies or foreclosures for borrowers and in losses for banks and other lenders."
In practice, won't this mean that, after the buyer has already gone through the process of getting approved for the loan, made plans to move in, arranged a closing date and sat down with the lawyers, they will be handed one of about twenty five sheets that they will have to sign which will tell them that there are risks involved, yadda, yadda, yadda, "just sign right here...and right here...and right here..."
To their credit, the GAO recommended that, in addition to anything the Fed recommends for this info sheet that it be written in "language that explains key features and potential risks specific to AMPs" with "effective format and visual presentation, following criteria such as those suggested by SEC's /A Plain English Handbook/."
I would really love to see that handbook. I'm sure it makes all this crystal clear.
-s