Thursday, June 18, 2009

More New Regulation!

The problem with Washington oversight is they haven't a clue what is important, only what is popular. The pitchfork and torches crowd is against 'rich guys in suits' and derivatives, and want to appear pro-active. So now we have:

Firms may have to put "warning labels" on their alternative products or require applicants to fill out financial-experience questionnaires, according to the administration.

"This is a game changer," said Ed Mierzwinski of U.S. Public Interest Research Group,

Warning labels? Has anyone seen a mortgage in the past 5 years? There are tens of pages, and you have to initial it in 17 places, so many none are read by your average borrower. So now we will have to initial in 34 places. If the warning light is always flashing, people ignore it. But to prioritize implies understanding the relative magnitudes of risk, and that is outside their scope. This doesn't change anything.

Getting rid of the OTS, and moving them into the Fed? Yawn. Everyone gets new business cards. The new Consumer Financial Protection Agency can now "enforce rules across a slew of financial products", and chances are these will involve a lot of busy work, mercilessly slamming anyone trying to sell a derivative that no longer has a market. They will probably also prevent financial institutions from diversifying their product base, making friend with industry lobbyists eager to prevent competition, all in the name of preventing another systemic collapse. But they will also now micromanage Community Reinvestment Act requirements, which surely had absolutely nothing to do with this crisis.

But what about the prime mover in all this, mortgage underwriting. You know, the loans without which derivatives and banks would not have collapsed? The FHA actually encouraged a program that allowed home buyers to pay up to 6% of the down payment, which is nice because that means no money down in many cases! The positive feedback loop of nonprofits getting Federal grants, giving money to poor people to buy homes they could not afford, supported by homebuilders and lenders who would then donate to legislators, could not be more corrupt. Last year, they quietly shuttered that one, but the FHA still proudly notes "The most popular FHA home loan is the 203(b). This fixed-rate loan often works well for first time home buyers because it allows individuals to finance up to 97 percent of their home loan". And the CRA lending targets that could only be acheived via lowering lending standards? The Consumer Finance Protection Agency supposedly will only double down: "A critical part of the CFPA’s mission should be to promote access to financial services, especially for households and communities that traditionally have had limited access." With the government on the hook, this merely means higher taxes, though, not systemic financial panic. That's a relief.

Regulator shopping, agency rating shopping, are all a sideshow. Sure they are bad, but it didn't matter because no regulators or investors thought those mortgage innovations had any risk. It wasn't like evil guys in suits were manipulating the system, the system was lending too much because it was thought to be profitable, safe, and morally good. It's like blaming binge drinking on beer commercials. Sure some knew it was a train wreck, but they were lonely voices, and giving Washington more power would have done zero back in 2006 because there was no large support for rolling back the insane mortgage underwriting standards that were implicitly predicated on home prices not falling.

Regulators are making sure the market won't make the same mistakes again. Perhaps the UN should inform Germany not to start any more two-front wars in Europe this century (didn't work out so well in the 20th)?


J said...

Well, some kind of reaction was coming anyway. I am wondering when we are starting to see some positive action, like micro-finance iniciatives. Dr Ann Dunham, Barack Obama’s mother, had been a consultant to the Ford Foundation in their microenterprise programs and to Bank Rakyat Indonesia, a microfinance institution. Geithner's papa also worked in it. Microfinance, microenterprise and appropriate technology, that is what is needed to solve our problems. In addition to more regulation to avoid the errors of the past. BTW, a typical Israeli mortgage agreement has about 50 pages, and take into account that Hebrew has no vocals, only consonants.

J said...

Addenda: 50 pg including tables and dictionary.

Anonymous said...

Maybe the derivatives and their salesman are the problem, not the loans and the banks.

You can't pin teh blame on dull people at banks, and even duller people borrowing beyond their means.

Is there really a need for these derivatives?

Does the borrower really need the money?

Maybe it's time to consider making some sacrafices.