November 2012

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FEATURE assets—a definition associated with provisioning require- ments—was changed in March 2004. The change accelerated to three months delinquent from six months, when a loan had to be classified as non-performing. "Taken together, said, "these three findings provide compelling evidence that regula- tory norms impact the risk of delinquencies experienced by our Indian mortgage provider on loans issued. Our evidence complements recent findings using U.S. data on the impacts of regulatory norms on mortgage screening and is also related to work on mortgage credit expansion in the U.S." " the researchers Regulation Nation A States followed almost naturally from the housing and credit crunch in the last decade. "It is quite understandable for ccording to Imura, tighter regulations in the United advisor and certified mortgage planner at the Kirkland Financial Center in Kirkland, Washington, also suggested the need for better coordination. "The current regulatory regime David Donhoff, a financial around residential mortgage financ- ing is a paranoid schizophrenic behind a driving wheel simultane- ously racing the engine full throttle and stomping on the brakes at full force, researchers said, are divided into two types: those that restrict the funding of mortgage lend- ing and those that incentivize Regulations in India, the " Donhoff observed. tent relationship between loan size and the propensity to be delinquent for loan sizes above the PSL-qualifying threshold," they wrote. Their study showed loan size target for priority-sector lend- ing (PSL), which includes loans to agriculture, small businesses, export credit, affirmative action lending, educational loans, and mortgages for low-cost housing. "There should be no consis- borrowers in arrears. While it is difficult to generalize findings from one country, these results do suggest that even seemingly innocuous changes in regulatory definitions can have important impacts on mortgage risk." Walzak saw a different impact has a substantial and statisti- cally significant negative effect on delinquency for smaller loans, but not for larger loans: "The probability of being delinquent "I do not think the issue is 'regulation,' but the type and rationale behind the creation of the regulations that needs to be revised." mortgage regulation to become heightened since the recent housing crisis," he said. "After all, for every foreclosure, there is a family losing their American dream. Although many industry participants may call govern- ment regulation 'too intrusive,' I believe there is a need to work with the Consumer Finance Protection Bureau and other government agencies on imple- menting effective policies." But have regulatory measures gone too far? "I do not think the issue is 'regulation,' but the type and rationale behind the creation of the regulations that needs to be revised," offered Becky Walzak, president of Looking Glass Group and Walzak Consulting in Deerfield Beach, Florida. "When the regulations are in sync with the industry and effectively protect all parties involved, then they become less intrusive and are better able to achieve their objective." 36 | THE M REPORT —Becky Walzak lending to "favored borrowers." Until 2001, mortgage funding was regulated in a fairly traditional manner, using leverage restric- tions on banks and HFCs, and interest-rate ceilings on deposit- taking HFCs. From 2002 onward, these measures were augmented by capital requirements against risk-weighted assets following the internationally standard Basel II framework. Similarities and Impacts D ry objectives in both the United States and India appear similar. Lending to small borrowers, for example, is an important political goal in India, Campell, Ranish, and Ramadorai wrote. Banks are subject to a quantity espite differences in govern- ment structure, the regulato- is far higher on average for PSL-qualifying and micro loans than for those above the PSL- qualifying threshold." They added: "We view this ing with the industry [in the U.S.] are aimed at aiding the consumer," she said. "Unfortunately, with the level of complexity in a mortgage transaction, the requirements result in the need to provide disclosures that have been far too complex themselves to provide relief to the consumers. Some of the changes that are currently out for comment appear to be heading toward simplification, which, once implemented, should achieve the original stated intention." U.S. regulators, according to of regulation. "In general the regulations deal- Donhoff, have gone too far. "Our politicians want to be as evidence that the PSL sub- sidy distorts the efficient-market relationship between interest rates and delinquencies, and that loans below the PSL-qualifying threshold are riskier than those above it." The change in the definition of regulatory definition of NPAs to a shorter length of delinquency appears to have generated signifi- cant impacts on the expected loss given delinquency of the mortgage provider," they said. "The impacts appear to be felt in reductions in the probability of delinquency, as well as in the eventual loss given delinquency, and strongly suggest a significant change in mortgage provider behavior in relation to seen as the sternly parental pun- ishers of wrongdoing," he said. "The evil 'wrongdoing' they are tilting their lances against are the recent real estate and mortgage market As such, the government has continually layered regulato- ry complications and restrictions haphazardly upon themselves without ever stopping to undo prior levels of complication, inef- ficiency, and ineffectiveness." Regulation, according to Imura, benefits both the bor- rower and the lender. "Mortgage regulation is non-performing loans (NPAs), they found, had a significant impact. "A simple change in the needed to establish the baseline even playing field so consumers are treated fairly and businesses have every opportunity to gener- ate a profitable business model," he said. "This requires clarity around mortgage regulation." New Jersey mortgage banker the mortgage industry," he said. "However, the current state of new regulations layered on top of existing ones under the auspices of reform will stymie mortgage lending." Richard Booth agreed, cautiously. "Regulation is necessary in

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