Reform step 1: license the brokers
“The first thing we do, let’s kill all the lawyers.”
Henry VI, Part 2: Act iv, scene ii.
That they lost
While the total scale of the global credit compression hasn’t been fully measured, most of that disruptive wave is behind us, as demonstrated by the gradual emergence of post-catastrophe proposals to reform the system. Reform can come in several ways:
Pray for sweeping reform
1. The imposition by plutocratic fiat, as has in fact happened when Treasury and the Federal Reserve executed their neat financial coup by banking on value, in a sophisticated and daring way – and good for them!
In my twenty or so years of banging my head against the edifice of policy complacency I’ve had occasion to [observe that reform requires catastrophe] multiple times; two years ago, in the context of France’s urban riots (which have, thankfully, quieted down), I even posted about it, but it was only recently, reading the Federal Reserve Bank of New York’s remarkable Congressional testimony about the Saint Patrick’s Day Weekend financial coup, that I realized how much of what we now take for granted in the American financial system is a byproduct of recovery from previous financial catastrophes averted or experienced.
The thing about providing capital is that you set the rules under which it is offered – so even if there’s no legislative reform, the financial coup will stick, at least as long as the banks need to lean on the Federal government, which is going to be for many months if not years.
I’m Lorenzo de Medici, and these are my lending terms
2. The sweeping overhaul, such as that proposed by Treasury Secretary Hank Paulson, to tumultuous applause J. The problem with sweeping overhaul is the necessity to sweep along the enthusiasms of others, and the utter Congressional inaction so far has been all too familiar.
As I put it back then:
The last few weeks have revealed gaping fissures in our financial liquidity system.
What do you mean, we outran our boundaries?
Will they lead to meaningful reforms, such as the sweeping reforms proposed by Treasury Secretary Paulson? It’s evident to me they should be – with any luck I’ll write the long editorial explaining why – but in the meantime, will they? To answer that, you have to answer this question: is the current catastrophe big enough?
Do you feel lucky, blogger?
In a democracy, painful governmental reform is deferred long as wishful thinking is remotely plausible. It normally takes an actual catastrophe – not a bullet dodged – to compel fundamental reform of an inadequate system.
Even though sweeping relief is on offer, in the homeowner bailout bill now working its way through the House and Senate, I haven’t posted about its potential major reforms, for two reasons: (a) they’re not enacted yet, and they’ll change many times before they get enacted, and (b) I never trust public-media descriptions of legislation, because until you actually read the words carefully, you have no idea whether it’s substance or sham.
Sham in a can, eh?
The third approach to reform is quieter, less readily comprehensible, and entirely unglamorous:
If only legislation wore amber sunglasses
3. Raving incrementalism, where changes are made little by little, when the opportunity presents itself. Incrementalism isn’t glamorous; it’s the binding with small threads, and yet when it’s done, there can be woven an effective tapestry.
Enough paper cuts can kill you
One such strand, that I think likely to pass, is featured in this little article I came across in The Central Valley Business Times:
The Senate Banking, Housing and Urban Affairs Committee has approved legislation by U.S. Sens. Dianne Feinstein, D-Calif., and Mel Martinez, R-Fla., to establish minimum national licensing and oversight standards for America’s mortgage brokers and lenders.
Feinstein and
The bill (S. 2595) is designed to ensure that all mortgage professionals are trained in federal lending laws, ethics, consumer protection, and the sub-prime mortgage marketplace, according to Ms. Feinstein’s office.
As we’ve seen, mortgages are complex instruments, with lots of variation. When non-standard loans are introduced, most consumers do not understand the risks, and it’s not always in the originator’s interest for the customer to be fully warned.
“No state has been hit as hard as
Does this mortgage come with instructions?
It would also create a national database for consumers to use to verify the credentials of their brokers and lenders.
Transparent feedback is always a good idea.
The legislation was included in landmark housing reform and foreclosure prevention legislation approved by the committee.
From the perspective of a piece of legislation slouching toward birth, inclusion in a comprehensive reform omnibus bill can be either good or bad. Good because the omnibus gets priority, bad because in the late-stage compromises, minor luggage like specialized bills can be tossed aside.
Hey, bub, we gotta get something enacted
“And we know that today the rules governing mortgage brokers and lenders are inadequate,” she says. “There is just a thin patchwork of regulation that varies from state to state. This legislation will create basic minimum standards for states to utilize to protect consumers.”
As I posted in when top-down works, national legislation is appropriate when
… you want the resulting product to be simple. In this, the real estate analog is the level-payment, self-amortizing mortgage (LPSAM). That’s real-estate-speak for, “you pay the same amount every month for some number of months, and eventually your mortgage is fully paid off.” In the LPSAM, all the sophistication is in the design – the customer interface is simple. Simplicity increases customer understanding, which adds to customer confidence, which expands volume.
I won’t go so far as to suggest that our subprime mess was caused by the introduction of unfamiliar and variable-payment financial forms … but I will suggest that innovation unfamiliarity contributed in two ways:
Home buyers familiar with level-payment self-amortizing were unprepared for the risks of variable-pay.
Securities buyers familiar with basic instruments were unprepared for the risks of derivatives.
People want to believe they can pay their loans; they want to believe that if they can’t, they can sell their homes for more than they paid. Poor people in particular are susceptible to the lure of easy-money-just-sign-here.
Mr. Martinez says the legislation would help prevent another mortgage meltdown.
“The lack of coordination between regulators exposes consumers to predatory loan originators,” he says. “A nationwide system to keep track of those who’ve violated the law, had their license revoked, or failed to fulfill appropriate requirements will benefit families and the marketplace.”
Back in the good old gangster days, police forces had their jurisdiction end at the stare line, inspiring all those wonderful movie scenes of the fugitive racing across the wooden railroad bridge in hopes of reaching sanctuary.
The legislation’s actual aims are modest enough:
Would require that residential mortgage loan brokers and lenders obtain a state license, and provide fingerprints, a summary of work experience, and consent for a background check to authorities.
Aside from not being a convicted crook, the most important point is the last one. Having a net worth or being bonded demonstrates collectability if sued, eliminating one of the major agency risks that has long encouraged originators to book the loan, regardless of the consequences.
The bill would also require the Federal Reserve, Treasury Department, and FDIC to register all residential mortgage loan originators employed by national banks within one year of legislation’s enactment.
And it would require state regulators to develop a satisfactory licensing system within one year of legislation’s enactment. If this does not occur, the Housing and Urban Development Secretary is given discretion to develop the national registry and license, generating revenue for its implementation by charging fees to license applicants.
There’s a threat! “If you can’t figure it out, we’ll let HUD do it.”
Let’s close this post with the same source we used to open it, and follow Dick’s campaign proposal with Jack Cade’s response:
DICK
The first thing we do, let’s kill all the lawyers.
Is not this a lamentable thing, that of the skin of an innocent lamb should be made parchment?
That parchment, being scribbled o’er, should undo a man?
Some say the bee stings: but I say, ’tis the bee’s wax; for I did but seal once to a thing, and I was never mine own man since.
Spoken like a man whose home is no longer worth what he paid for it.
How now! who’s there?
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