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Thursday, March 22, 2007

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. ...

    Posted by on Thursday, March 22, 2007 at 12:33 AM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (15)

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