The Financial Collapse Of 2008

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After the financial collapse of 2008, the mortgage environment changed dramatically for both buyers and brokers. In order to protect consumers and raise confidence in the market, the Federal Reserve Board introduced regulations that limited what banks and mortgage originators could do such as curtailing certain business practices and imposing stricter requirements on capital. However, these actions have unintentionally affected broker competition, causing big banks to exit the housing market, which has led to the proliferation of shadow banks and higher-risk practices. These unforeseen consequences could potentially put the housing market at risk by creating a negative environment for consumers instead. The new regulations that were…show more content…
This prevents mortgage brokers and loan officers from steering consumers into considering riskier loans in order to earn higher compensation. The regulations also removed the incentives that would entice brokers to push consumers into higher-yield plans by prohibiting brokers from sharing commissions with loan officers, who must be paid a salary. While the Federal Reserve had the intention of eliminating these unethical lending practices, the result was a deterrence from the independent mortgage business overall. Without the prospect of earning commissions, loan officers lose incentive of accepting deals that would take relatively longer periods of time to close. They would be paid the same rate regardless of the kind of loan they make to borrowers. Furthermore, the regulations also have an important consequence when considered with the Dodd-Frank Wall Street Reform and Consumer Protection Act, where under “section 1413 of the Dodd-Frank Act, which states that any violation of the loan originator compensation rules will offer the borrower a ‘defense to foreclosure’ for the life of the loan” (Smith, 2011). Under this rule, a delinquent borrower can potentially prevent his or her lender from foreclosing on a loan if the borrower finds a violation of the compensation rules under Regulation Z. Consequently, large banks would be deterred from buying mortgages with
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