Regulation of Mortgage Markets

Has regulatory oversight of mortgage markets been too lenient?:

Regulators Scrutinized In Mortgage Meltdown, by Greg Ip and Damian Paletta, WSJ: The well-publicized woes in the business of subprime mortgages ... are raising a big question: Are regulators partly to blame?

Federal regulators over the past decade issued rules to tighten standards for making loans to borrowers with blemished credit or low incomes. Yet standards still declined and the volume of loans surged in the past two years.

One reason: Changes ... have moved large swaths of subprime lending from traditional banks to companies outside the jurisdiction of federal banking regulators. In 2005, 52% of subprime mortgages were originated by companies with no federal supervision... Another 25% were ...[only] indirectly supervised by the Federal Reserve...

"What is really frustrating about this is [federal regulators] don't have enforcement authority to do anything with these state-licensed, stand-alone mortgage lenders," says Fed Reserve Governor Susan Bies.

Yet even where federal regulators have jurisdiction, they sometimes have been slow to grapple with the explosive growth in especially risky practices and quick to shield federally regulated banks... The underlying belief, shared by the Bush Administration, is that too much regulation would stifle credit for low-income families, and that capital markets and well-educated consumers are the best way to curb unscrupulous lending.

The industry argues the system is working. "Market discipline in this industry is swift, can be severe, and is more effective in changing lending practices than any potential changes in regulation," says Doug Duncan, chief economist at the Mortgage Bankers Association. ... Consumer advocates counter that families have been losing their homes and savings to excessively burdensome loans for years. ...

"Perhaps we all should have done something earlier and faster," says Sheila Bair, ... chairman of the Federal Deposit Insurance Corp. ... "Early on, regulators didn't see extensive consumer complaints and credit distress," she adds, noting that rising home prices masked some of the problems. ...

There is widespread agreement that the biggest shortcoming in the regulation of mortgages is the patchwork of state and federal oversight. Amid rapid evolution in industry practice, the system leaves many market segments barely supervised, and some supervised by multiple regulators.

Lenders that aren't federally regulated are generally state-licensed. But many state regulators lack the resources and mandates of their federal counterparts. Some of the biggest subprime blowups have happened in California. The home-state regulator, the California Department of Corporations, has 25 examiners to oversee more than 4,800 state-licensed lenders, including many of the country's largest subprime companies. By comparison, San Francisco-based Wells Fargo & Co. alone has 34 examiners from the federal Office of the Comptroller of the Currency [OCC] and the equivalent of 12 Fed examiners assigned to it.

Federal regulators, meanwhile, have tended to focus more on the solvency of the institutions they oversee and less on individual consumer complaints. ...

Public disciplinary actions by federal bank regulators are rare. ... Federal regulators say they spot and correct problems quietly during the examination process before they reach the point where public enforcement action is needed.

Regulators appointed by President Bush often have been more sympathetic to industry concerns about red tape than their Clinton administration predecessors. When James Gilleran, a former California banker and bank supervisor, took over the OTS in December 2001, he became known for his deregulatory zeal. At one press event in 2003, several bank regulators held gardening shears to represent their commitment to cut red tape for the industry. Mr. Gilleran brought a chain saw.

He also early on announced plans to slash expenses to resolve the agency's deficit; 20% of its work force eventually left. ...[H]is successor, Mr. Reich, a former community banker, has reversed many of Mr. Gilleran's cuts. Citing "understaffing," he hired 80 examiners last year and plans to add 40 more this year. ...

Last fall federal bank regulators, at the urging of consumer groups and after extensive debate, proposed standards on "nontraditional mortgages" that they thought would compel banks to make "teaser" loans only to consumers who could pay the highest interest. ... However, with the subprime market already imploding, some bankers and regulators worry the new guidance could boost defaults by making it harder for strapped borrowers to refinance.

Recent events have prompted regulators to join the industry in calling for national laws to oversee the mortgage market. "Congress needs to seriously consider a national anti-predatory lending law that would apply to all mortgage lenders," said Ms. Bair. Ms. Bies shares that view, but also warns enforcement powers are needed. ...

Comments

[paine]

too lenient ???

you bet

try a scandal worthy of the late 80's s and l scandal

in fact many parallels exist here

of course the fed and d.o.t both escaped the pillary
that time
so its most likely will this time

i say
"barney goggle

for starters
drag alan of green stables
up b4 your house committes and beat him into syrip"

[Bruce Webb]

Wow, Cowan reveals more than he realizes here:

"It is precisely because competing insurance companies spend money evaluating the appropriateness of claims that they are willing to pay for so many heart bypasses, extra tests, private hospital rooms and CT scans."

I'll give you the heart bypasses, I guess, but why on earth should we valorize "extra tests, private hospital rooms and CT scans". Basically Tyler is making the argument for Yuppieness here. Sure health care sucks if you are poor, but I can get an unnecessary high tech scan just to help my state of mind.

You would hope he was writing from a deep well of irony here. But I suspect that for Tyler not having to actually share a hospital room with the hoi polloi would go a long way towards justifying the current system. Under which I suspect his own needs are covered.

[Bruce Webb]

Well the former comment showed on the wrong thread. Oh well pointing out the fatuity of Tyler is like shoveling back the sea at the best of times.

But this is closer to my current interests anyway. It is far from clear that the sub-prime meltdown is anything more than a market correction. Not every investment works. That is not a tragedy, that is capitalism. I worry very much when I read things like this:

"Consumer advocates counter that families have been losing their homes and savings to excessively burdensome loans for years. ..."

Yeah sure you betcha. Predatory lending isn't new. And certainly some lenders have been pushing mortgage products that were wildly unsuited to naive borrowers. But none of that seemed to add up to crisis before the lenders started folding. New Century gets its financing pulled and NOW everyone gets their panties in a bunch over poor people losing houses.

ARMs are not new. Resets that overburden monthly income are not new. Rich people losing money investing in sub-prime is new. And therefore a crisis.

It's not about the poor people. It never is. It mostly is about Countrywide's stock price and Wells Fargo's next quarterly statement. Sub-prime made a lot of people a whole lot of money over the last few years. Well somebody took the gravy bucket off the gravy train and people who were feasting on turkeys and gravy are suddenly crying starvation.

Well I am not biting.

[paine]

bw

you are of course right
this is bail out the corporate lenders time here

not reform the market time

ie 1989 all over again

but spot lights on regulators
are required here

if we are to regulate this market
to avoid bubbles in the future

starting with the culprit in chief
greenspan

why him??

cause the fed chair
is THE czar of the credit system
and purportedly independent of party politics or class ploitics

if you are not "into"
bubble avoidance
then you must either
think

they're just what the pikers and greed heads deserve

or

bubbles aren't really bubbles
because
a they don't exist
or
b they might but not here

or

bubbles exist but
are too hard to differentiate
from real jumps in value
to be regulated properly
ie reg does
more harm then good

[anne]

Paine is writing well, indeed.

says...

"The underlying belief, shared by the Bush Administration, is that too much regulation would stifle credit for low-income families..."

Ah yes, concern for low income families has always been at the top of the Bush agenda; just like low income tax cuts or low income relief for Katrina refugees, or the payday loan system for the low income military, not to mention those low income fund raisers for low income soldiers trying to buy body armor.

[Isabel]

I suppose this shows the invisible brain of the market at work (I'm quoting the ineffable Tanta here, answering to a commenter):

"There was a time when every junior lien lender out there had and enforced a "no neg am on first lien" rule. Then some of them started drinking the Kool Aid. It's almost (but not quite) the dumbest thing I've ever seen a lender do. (I still think letting the builder or seller make the borrower's first six payments wins the Darwin Award, but this one sure gets an honorable mention.)"

Pretty weird.

[Bruce Webb]

"There was a time when every junior lien lender out there had and enforced a "no neg am on first lien" rule."

Well there is a cruel joke built into that sentence. Because not one in a hundred Americans could tell you what it means. I can. Now. Because I have a license in my wallet backed up by some classes and nine months working in a lending office. Ten months ago my mouth would have been gaping.

"no neg am on first lien". Is that Spanish? Mandarin? Russian? Nope it is Lenderese. It's like Pig Latin, its not hard once you know the tricks. But God help you if you run into the Trickster first.

And you would have to be pretty bold to write a second on a neg am first to begin with. That is pretty much throwing money at the wall hoping it comes back compounded. I understand betting on the Come but how many rollers are really that hot?

[Isabel]

"And you would have to be pretty bold to write a second on a neg am first to begin with. That is pretty much throwing money at the wall hoping it comes back compounded."

Precisely. Apparently, some people have been doing it. Why?

[Bruce Webb]

Why?

Because fees are payable at funding.

Sub-prime fundamentally separated the interests of people writing the loans from those who ended up taking the risk.

If you could find a loan product that fit your borrower why not write the loan?

[Isabel]

Yep. It looks like a bad system to me. Wouldn't a little regulation help?

[Bruce Webb]

Regulation?

Certain people out there have me pegged as a raving Socialist (Hi Don!) but fundamentally I believe in capitalism, that is if capitalism retains the element of rich people losing money on bad investments. Which element has been sadly lacking over the last few decades.

The risks of sub-prime loans to borrowers have not really changed at all in any fundamental sense. Up market/down market teaser rates and resets were always risky depending on your income. Predatory lending has always been out there. And until about two weeks ago no really gave a rip.

Until of course rich people started losing money. And mortgage companies started going out of business. Suddenly it turned to "crisis" and oh yes, it's all about the poor borrowers.

So I don't think the answer is regulation, we already have laws on the book against mortgage fraud. And yes we need to crack down on the predators out there putting people into products that have no objective advantage.

But the reality of the stated/stated market is that all participants are pretty much fully aware of what is going on and nobody is a victim. Anymore than I was a victim of the roulette table last night. I bet, I lost. And I'm not expecting any government bailout.

[paine]

look one aspect of this is simple
the gross flow of funds into mortgage agreements per quarter

if that flow looks excessive
you up the regs wack the portfolios
do what was belatedly done in 89
after the S&L thing got beyond bad
into dangerous

bw to have the cap system you could live with
IMO
you'll have to find a time machine
that has at least a 500 year range in either direction
so you could see just how futile your dream is

says...

Somebody making $80K-100k with benefits may get soaked in this, but what about the rest of us with old fashioned IRAs and no benefits or healthcare. Wasn't the original idea behind mutual funds, that those who couldn't come up with $10k for 1000 shares of one of those blue chip stocks at $100/share, could get in on the action? What about the gov't insisting we all ought to be investing our own money rather than expect a social security safety net? Oh, and tell me, who can actually live solely on the tiny social security checks anyway? Soak rich investors? maybe.... soak a lot of a few of the rest of us too.