subject: Mortgage Analytics News And Views: Financial Reform Is Official; Groups Call For Government Involvem [print this page] After months of fine tuning and Capitol Hill bickering, financial reform is finally official. President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law Wednesday, kicking the surrounding media frenzy into an even higher gear.
Last week we shared some folks' speculation as to how the then-pending bill might affect the mortgage analytics industry. With those prognoses now a bit more real, these week we've been paying attention to some more specific and tangible implications. Industry groups and banks, for example, are mailing the White House with their specific concerns about setting the right precedent right out of the gate in terms of lending regulations. And on the broader end of the spectrum, there are also those of the belief that no legislation can change Americans' innate borrowing habits overnight.
The Mortgage Bankers Association submitted perhaps the most specific vision for a new housing finance structure. Under its model, privately-owned corporations would apply for government charters to guarantee mortgages and package them into securities. The timely payment of interest and principal on the securities would be guaranteed by the government.
The model eschews the implicit federal guarantee that many blame for allowing Fannie and Freddie to grow too large and reckless.
"In our proposal, the extent of federal backing would be greatly constrained, making explicit what is guaranteed and what is not, and establishing mechanisms to properly capitalize, price and supervise those activities," MBA Executive Director Benjamin Hatfield wrote.
The comment letters highlight some crucial fault lines in the debate over the extent and structure of the government's role in the housing market.
Bank of America argued that housing GSEs shouldn't hold portfolios of mortgages or mortgage securities, for example. The community bankers group, however, said that holding loans on their balance sheets allowed Fannie and Freddie to serve smaller lenders that were selling small volumes of loans into the secondary market.
The question of ensuring that mortgage credit flows to poorer borrowers is another flashpoint.
Critics blamed Fannie Mae's and Freddie Mac's affordable housing goals for increasing the enterprises' risk. State housing agencies and community groups, however, say that backing loans from underserved markets should be a core part of housing GSEs' public mission.
"Buying affordable loans did not get Fannie Mae and Freddie Mac into financial trouble. Buying bad loans did," the National Council of State Housing Agencies wrote in a letter.
The American Bankers Association argued that housing GSEs should support the availability of mortgage credit broadly and efforts to serve poorer borrowers or other underserved markets should be left to other programs or entities.
A group of housing groups and academics, in a joint letter, said policy makers should relax their emphasis on homeownership and focus more on ensuring an adequate supply of cheap rental housing.
"Going forward, policy makers must refocus on the goal of promoting affordable and stable housing options, and pull back from the idea of emphasizing homeownership, regardless of sustainability or cost, as a goal for its own sake," the groups wrote.
Industry remains concerned about the disruptions caused by switching to a new structure, particularly if the housing market remains fragile. Policy makers should focus on the costs to the industry of the adjustment to a new regime, the Independent Community Bankers of America argued.
"Just changing the GSEs' names would entail a significant re-write of most mortgage processing, underwriting and servicing technology platforms," the group wrote.
Save your breath, says Rachel Beck of the Associated Press. No matter how the new legislation shakes out in practice, Americans will always over-borrow:
New regulations, which President Barack Obama signed into law on Wednesday, can only go so far to prevent future financial crises like the one we are living through. Banks will still lend. And many of us will borrow too much.
"You can't legislate diligence," says Robert Lawless, an expert on consumer credit at the University of Illinois College of Law and a contributor to the blog Credit Slips. "You can't pass laws that make people be careful when they take out loans."
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Amazingly, the pace of consumer borrowing hasn't fallen off that much, even in the wake of the recession and financial crisis. Mortgage lending has dropped, but borrowing on credit cards and other loans, such as for autos, is only slightly below historical levels.Federal Reserve data shows consumer borrowing ran at an annual rate of $2.42 trillion in May. That was the 15th decline in 16 months, but the amount is still on par with the winter of 2007, when credit was still booming.
The new rules might get rid of the riskiest loans in the marketplace. Regulators will be able to ban financial products they think are unsafe or outlaw things that might be confusing, like the fine print on credit card or mortgage applications. Mortgage lenders will also be required to verify a borrower's income, credit history and employment status.
Those are good first steps, but they'll be meaningless if Americans continue to ignore the basics rules of avoiding credit disasters.
We have to understand the kinds of loans were are getting, and whether we can afford them. An adjustable-rate mortgage isn't a bad thing on its own, but it can be if you don't realize your rate could go from 2 percent to 10 percent five years from now.
We don't need a wallet full of credit cards. We have to save more. We have to read the disclosures on every loan we get.
"You can't force people into long-term financial stability," says Todd Mark, vice president of education at the Consumer Credit Counseling Service of Greater Dallas. "Plenty of people still don't understand the dangers of debt."
Mark and other credit counselors worry what happens next, when the economy improves and credit flows more freely. If the unemployment rate finally retreats, the bingeing could come back, maybe even more than before.
"When credit is easy, it can be rational to over-borrow," says Lawless of the University of Illinois.
Unless Americans radically change their approach to credit, we know where this story goes in five or 10 years. It will look a lot like the mess we're in today.
