When people contemplate what went wrong in the housing bubble, they frequently point to lending: subprime loans, interest-only loans, negative amortization loans, and securitization were the helium that inflated the bubble.

That's not really true, nor fair. These products have been around for years and had served the borrowing public well. The problem was really the misguided belief that an asset – housing in this case – can only rise.

The chief problem today, and a primary impediment to the housing recovery, is excessive regulation, which is limiting choice. A recent report from FBR Capital Markets points to a regulatory environment that is “plain vanilla” in that it favors the 30-year fixed-rate loan above all others.

Now, there is nothing wrong with the standard fixed-rate mortgage products, but other mortgage products have their place. Indeed, you could argue that taking an interest-only loan to purchase a Phoenix-based home late in 2011 was a savvy business move; the buyer would have tied up little of his own capital to purchase a bargain-basement asset that has since appreciated strongly.

Many regulators and even more mortgage-industry participants have called for the need for more private mortgage investors to enter the market. For that to occur, though, these investors need the freedom to offer products that will satisfy a wider swath of borrowers needs, while also enabling them to earn a profit.

We think 2013 will become the year of diversity: that is, a more diverse, heterogeneous mortgage lending market with more private investors. We say that because economic growth impacts regulation, and we see economic growth in 2013. Generally, the higher the growth, the more accommodating the regulators.

We look forward to a strong 2013, and a stronger, more flexible mortgage lending market.

Courtesy of Jessica Regan.

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