I think Fed's idea to disallow no-doc / low-doc loans would have been a good idea before the housing bubble, but in today’s climate its impact will be devastating. This significant tightening of the consumer credit policy cannot come at the worst possible time.
Many people faked their income to be able to afford the home they want or any home at all. With housing costs increasing faster than their incomes, faking income was possibly the only way to become a homeowner in their lifetimes. Others may have had a good income but lost their jobs (temporarily or permanently) or simply retired. Yet there is another category of small business owners who find it difficult to qualify for a loan.
Many of these folks, who are good payers with high credit scores and ability to pay, under new rules will not be able to qualify for a new loan, either refinancing (to take advantage of lower rates or to avoid ARM reset), cashing out to meet short term obligations or major expenses or needing / wanting to move to a different part of the country.
Inability of these people to obtain a mortgage will contribute significantly to increased backlog of homes as well as push away potential new home owners because
o Who wants to invest in depreciating assets?
o Home values seen as considerably more volatile (risky), reducing attractiveness and increasing cost of financing purchase.
o Home is seen as an asset which is hard to buy and to sell (not liquid) or has a potential to become not liquid during the course of ownership.
o Loss of confidence in regulators who can step in arbitrarily at any point and change rules of the game in a way that will wipe out your investment returns.
It will amplify housing market slump and cause more people to loose their retirement nest eggs they have built as equity in their homes. Many will be forced into foreclosures, bankruptcy and poverty and is likely to result in major recession / depression.
This step will not “punish” those who have speculated or got into homes they could not afford – this will punish everyone.
Tightening consumer credit policy and causing the housing prices to plummet even more than they already have, is the craziest idea I have heard coming from Washington in the long time.
There is a 90 day public comment period. You can let your opinion to be know by going to Fed's web site.
Although Collective2 web site has an option of displaying real trades along with hypothetical trades, my trades were not reported for some reason). The table shows a summary of discrepancy of my results versus reported by c2 web site.
