Paul Mirengoff at Power Line posted an article yesterday about the new Dodd-Frank rules regarding mortgages that will go into effect on January 10.

The article points out that because Congress chose to ignore the actual cause of the problem, the new rules will not solve the problem. The article cites comments by Diane Katz of the Heritage Foundation.

The article reports:

As Katz points out, Washington’s response to the financial crisis of 2008 rests on the premise that the housing bubble and subsequent crash were the fault of unscrupulous mortgage lenders who took advantage of naive, uninformed consumers. In reality, she says, “lenders and borrowers were responding rationally to incentives created by an array of deeply flawed government policies.”

What were these policies? Primarily, (1) artificially low interest rates set by the Federal Reserve, (2) the massive subsidy of risky loans by Fannie Mae and Freddie Mac, (3) and the low-income lending quotas set by the Department of Housing and Urban Development.

Rather than admit that the government was a major part of the problem, Congress simply directed the focus elsewhere, passed laws that will not address the problem, and continued on its way.

The article reports:

At the heart of the new regulation is a requirement that lenders ensure that borrowers have the “ability to repay” a mortgage. Borrowers will now have the right to sue lenders for misjudging their financial fitness. Borrowers may also assert a violation of the ability-to-repay requirement as a defense against foreclosure, even if the original lender has sold the mortgage or assigned it to a servicing firm.

The impact of this new scheme is obvious. As Katz says, it “will raise the costs and risks of mortgage lending” and thereby result in less credit availability.

I wonder if you lie about your income on your mortgage application if you still have the right to sue.

Diane Katz sums up the problem:

The 3,500 pages of new mortgage regulation will not guarantee that a housing bubble and collapse will not happen again. Nor can such inflexible standards possibly keep pace with the constant changes in market conditions. But it will constrain the availability of credit and increase the costs. Such a regime eviscerates the fundamental principles of a mortgage “market,” thereby punishing consumers more than protecting them.

The federal government gets more power to regulate and the American people pay the price.