My friend Matthew Shadbolt alerted me to this editorial by Ken Harney, a columnist for the Washington Post, that was published on The Real Deal. Harney believes that the not-yet-fully-formed Consumer Financial Protection Bureau can’t get here fast enough, and that the days of wine and roses will soon dawn upon us:
The financial reform bill signed into law by President Obama may look like a giant cornucopia of helpful changes for homebuyers and loan applicants — not the least of which will be the creation of a powerful Consumer Financial Protection Bureau to ride herd on the mortgage lending industry.
Well, forgive the snark, but… a giant cornucopia of helpful changes for homebuyers and loan applicants?Really?
Let’s see what the wondrous benefits of a $500m federal agency we’re about to receive are.
The Benefits
Harney lists the following as tangible benefits of the new law and the $500m bureaucracy it spawned:
- Replacing the HVCC (Home Valuation Code of Conduct)
- National hot-line system for “aggrieved mortgage borrowers and others to lodge complaints and alert the bureau to unfair and deceptive practices.”
- Rewrite of the existing home purchase disclosure rules under RESPA
- Rules requiring loan officers to verify borrowers can actually pay.
Let me see here…
#1: HVCC was and remains a problem… but uh… I do believe it was Fannie Mae and Freddie Mac, two supposedly private companies, that promulgated those rules? Why yes, yes they were. And in fact, FHA and FHLB (Federal Home Loan Bank) loans are not covered under HVCC?
So the problematic HVCC rules exist only because Fannie Me and Freddie Mac have a stranglehold on the American mortgage market?
#2: Although Harney doesn’t define what “unfair and deceptive practices” mean, presumably such practices stop short of fraud. Because if such practices do constitute fraud, we have this whole branch of the government — local, state, and federal — that deals with fraud known as the courts. And of course, banks are regulated by state and federal entities, and mortgage brokers are also licensed and heavily regulated. So what this hotline will actually do, beyond provide government jobs to thousands of civil “servants” is beyond me.
#3: Rewriting RESPA disclosure rules seems sensible. Do we really need a $500m per year bureau to do that? How often are we going to rewrite those rules? Couldn’t we just pay some smart lawyers at some law firm somewhere to write the damn rules one time and revisit it every few years for say $250,000 per rewrite?
#4: Requiring loan officers to verify the borrower’s ability to pay sounds like a grand plan. But I can’t help but ask why this wasn’t being done during the bad-old-days.
Harney thinks it was because there were no regulators looking over the loan officer’s shoulders:
Not only did they not worry about who could afford what. There was no federal watchdog on the scene to make sure they did. Now there will be.
Wooha! Problem solved.
But… it doesn’t make sense to me. If I’m loaning my money out to someone, why in God’s name wouldn’t I check and doublecheck that the guy I’m lending money to is able to pay me back? A banker that doesn’t do that is unlikely to stay in business for too long, no?
Turns out, mortgage bankers haven’t had to do that because Fannie and Freddie were buying up their mortgages. It’s only my money that I’m lending out for a short period of time, after which, it becomes Fannie and Freddie’s problem. See how that works?
And now that Fannie and Freddie have been taken over by the Federal government, the banks aren’t lending their money to borrowers — they’re lending your money to borrowers. And my money. And my kids’ money. So yeah, I guess we’d better have ourselves some federal watchdogs.
Or Maybe…
Here’s a thought.
Rather than doing all that heavy lifting, why don’t we just get rid of Fannie Mae and Freddie Mac and get the taxpayers out of the business of financing mortgages? Wouldn’t that achieve Harney’s goals and benefits just as well?
No Fannie/Freddie = no HVCC. Banks, sellers, buyers, realtors — everyone would have to go find themselves an appraiser that all parties could trust to render an expert opinion.
No Fannie/Freddie = banks risk their own capital. How likely will loan officers be to pay extremely close attention to the borrower’s ability to repay when that’s the case?
New disclosure rules are fine; in fact, they’re wonderful. But I’d be willing to find a top notch law firm in New York or Washington DC that would write those rules for a fraction of the $500m we’re talking about here. And instead of a national aggrieved mortgage borrower hotline, just let attorneys file class-action lawsuits against banks that have committed fraud or abuse. The courts — and the market — will take care of that problem in short order. The banks and mortgage brokers will naturally find it in their best interest to have disclosure forms be as clear as possible, written in 4th grade English, and explained in a variety of languages to potential borrowers.
Oh, and by the way, this future is probably where we’re headed anyhow in some form or fashion.
Sorry for the snark. Or not.
-rsh
4 thoughts on “Bring the Snark: Ken Harney and Consumer Financial Protection Bureau”
Rob there's a backstory on HVCC that's relevant here. Fannie and Freddie, and their federal regulator agreed to implement HVCC only after they were subpoenaed by NY Attorney General Andrew Cuomo as part of a wider investigation into the mortgage securitization process.
You may recall that Cuomo sued First American Corp. and its subsidiary eAppraiseIT in November, 2007, alleging that the appraisal management firm bowed to pressure from Washington Mutual to send work to appraisers who would “hit the numbers.” Washington Mutual was not named in the lawsuit, which is still pending, and all the companies involved have denied the allegations.
A week later, Cuomo subpoenaed Fannie and Freddie, seeking details about loans the companies purchased from banks, and information about appraisal practices. Fannie and Freddie agreed to abide by HVCC four months later, although they didn't implement the rules until May 1, 2009.
BTW, Fannie and Freddie weren't the ones buying up most of the subprime and Alt-A loans that were packaged into mortgage-backed securities — the vast majority of the “private label” MBS that funded this type of lending was sold to other investors besides Fannie and Freddie.
It's important to note that Fannie and Freddie play two roles in financing mortgage lending.
1. They guarantee payments on MBS that meet their own standards (which were and are much higher than those for subprime and Alt-A loans). You take that away right now, and the question is, are private investors still going to be willing to funnel money into mortgage lending? If not, everybody will basically be in the shoes of today's jumbo loan borrower.
2. Fannie and Freddie are also MBS investors. They did buy some subprime MBS which they have seen heavy losses on, but those investments constituted a small percentage of the total subprime MBS universe. Some would say the solution is not to get rid of Fannie and Freddie altogether, but to limit them to the MBS guarantee business.
So the answer to your question, “If I’m loaning my money out to someone, why in God’s name wouldn’t I check and doublecheck that the guy I’m lending money to is able to pay me back?” is not because “Fannie and Freddie were buying up their mortgages.”
For the most part mortgage bankers who were packaging the subprime and Alt A loans you are talking about into private label MBS not guaranteed by Fannie and Freddie had to sell those to somebody else. Who? People who believed the AAA ratings some subprime MBS and CDOs got from the ratings agencies.
Which is not to say Fannie and Freddie weren't part of the problem, but the problem and its solutions are much more complex than you portray them.
More recently, the government HAS been buying up huge quantities of MBS to keep interest rates low, although the Federal Reserve wrapped up its $1.25 trillion in purchases of Fannie and Freddie MBS in March. Those are loans that meet Fannie and Freddie's underwrting standards.
As far as rewriting the RESPA rules, I think it's a little disingenuous to suggest that the federal government will spend $500 million on that particular project — or that hiring a “top notch law firm” to conduct what is a public rulemaking process would serve taxpayers better or save them some money.
More and more government intervention and micro-management that stifles sustainable economic growth. Oh yay! And Matt, great points and insightful information (I'll have to check out your site/blog), but I'm still against big government due to the overall lack of efficiency or accountability.
Ahh, Matt, if you're going to get all serious and logical and stuff, I can't really bring the snark to full effect! 🙂
Okay, let's consider some of your points.
True that Fannie/Freddie were not the sole cause of the problem. And I do not excuse the idiocy, greed, and foolishness that plagued investors, borrowers, mortgage brokers, realtors, bankers, and so on. However, I don't think you can so easily discount the role of GSE's and our glorious superior minds in government:
In 1996, HUD set a goal for Fannie Mae and Freddie Mac that at least 42% of the mortgages they purchase be issued to borrowers whose household income was below the median in their area. This target was increased to 50% in 2000 and 52% in 2005. (Wikipedia: http://en.wikipedia.org/wiki/Subprime_mortgage_…).
And the HVCC is a Fannie “innovation” no matter how much Andrew Cuomo, in his desire to be governor of NY one day, tried to exploit the issue.
Finally, while it may have been true that the private secondary market for MBS was larger before the Crash, there is no doubt in my mind that today, without the Fed, working oftentimes through Fannie/Freddie, there is no secondary mortgage market.
Those people who believed the AAA ratings of subprime MBS, most of them were not people per se, but commercial banks and hedge funds and insurance companies. I would have been fine with letting all of them lose their shirts, despite the fearmongering about the global financial system collapsing around our ears. Maybe I just have more faith in capitalism than most.
But the larger point remains. Harney believes that the reason why bankers were making stupid loans was because there weren't enough Federal regulators looking over their shoulders. I believe that the reason why bankers were making stupid loans was because they were depending on the secondary market (aka, the Greater Fool theory of investing), which included the Federal Government, and continues to include the Federal Government, to take those stupid loans off their hands. Cut off that spout, and the stupid lending stops. Nearly overnight. Without needing to hire thousands of new bureaucrats at taxpayer expense.
As for RESPA rule writing… you don't actually believe that legislators or their staff or the people at HUD would actually write those do you? When there are literally hundreds of lobbyists (i.e., high-powered Washington DC law firms) who would hand them the language of the regulation to affix their name to? I'd much rather that we the people hire those smart lawyers to do the writing for us, in a public rulemaking process, than to have them be hired by various moneyed interests who would do it behind the scenes.
Bottomline is… if we don't need more regulators since we can simply shut off the government support for banks instead, and we don't need to rewrite the rules except at relatively low cost by hiring the lobbyists directly, I'm not entirely sure why we need a new $500m a year bureaucracy.
But then again, this is just my likely ill-informed opinion, and I'm always happy to learn the ways in which I am wrong. 🙂
Now, back to saving the galaxy from the Zerg menace.
-rsh
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