Thursday, August 9, 2007

Subprime in Michigan: New Best Practices From OFIS

Defaults on subprime mortgages in the United States are at the heart of a global credit and finance crisis that has been rattling international markets for weeks. Today the BostonHerald reports that "France’s largest bank, BNP Paribas SA, announced that it was freezing about $2.2 billion worth of funds, citing the deteriorating subprime loan market in the U.S."

Subprime-backed hedge funds are all about repackaging really bad loans as a great investment opportunity--passing the buck or tossing the hot potato for profit.

As the U.S. housing bubble continues to pop, Michigan ranks fifth for foreclosures-- caught in the perfect storm of huge manufacturing job losses, subprime mortgages, unprecedented consumer debt, questionable mortgage lending practices and little regulation of the entire financial sector.

The Michigan Office of Financial and Insurance Services has issued regulatory best practices for mortgage originators that market and sell adjustable-rate mortgage products to subprime borrowers. (press release)

Michigan's OFIS has a big job--regulating HMOs, banks, domestic insurance companies, investment advisors, securities broker-dealers, consumer finance lenders, insurance agents and securities agents. It's a tough job, but someone has to try.

Since1981 the number of mortgage companies in Michigan has gone from zero to approximately 3,200.

And what are these best practices for subprime mortgage lending? You won't find a summary in the press release, but you can wade through the "regulatory guidance" yourself.

The document assumes subprime lending will continue.

The OFIS statement contains many shoulds, but not a single "must." These are not rules that must be followed. They are prudent measures that, if implemented, could spare a lot of consumers a lot of pain. Given the unfolding global financial news, they seem too little too late.

Offering risky ARM products to high risk borrowers might be immoral, but it isn't yet illegal.

Until federal government regulations or a global credit freeze stop non-depository lenders from making bad loans, caveat emptor.