MORTGAGE RATE COMMENTARY

WASHINGTON (MarketWatch) -- Building on a Federal Reserve paper on the housing market released earlier this week, a key Fed president on Friday called for new ways to improve the market, notably an increase in mortgage refinancing and "earned" principal reduction for borrowers who are underwater but kept on making their mortgage payments. New York Fed President William Dudley on Friday said he would like to see "refinancing made broadly available on streamlined terms and with moderate fees to all prime conforming borrowers who are current on their payments." Dudley also called for getting banks to accept more risk, have looser underwriting and smaller risk-based premiums, and getting appraisers to have less of a "downward bias." He also called for a $15 billion-a-year bridge loan program to those who are laid off so that they can keep paying their mortgage while finding a new job. Dudley added that the Fed should continue to "evaluate whether we could provide additional accommodation in a manner that produces more benefits than costs, regardless of whether action in housing is undertaken or not.

The mortgage broker industry was vilified for letting under qualified borrowers obtain mortgages. Now the Fed is putting pressure on the banks to loosen guidelines. That means the banks will create new products for brokers to sell. When it goes south, like it did in 2007, the brokers will be hung out to dry again.