Spank the Banks
In an op-ed, which ran in today’s Atlanta Journal Constititution, I discuss the steps that Congress should take in retooling the way that banks do business in the mortgage market: http://www.ajc.com/opinion/congress-must-get-tough-186473.html
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Last spring, I wrote a paper on mortgage lending practices and their relationship to the economic crisis.
There are as many opinions about the causes of the current economic crisis as there are critics. Some commentators argue that the crisis was provoked by “fiscally-challenged” individuals who bought homes they could not afford by taking out mortgages that they could not pay- often in the form of subprime mortgages. While there is some truth in this assertion, it is certainly not sufficient to be consider anywhere near the primary causative factor. Others argue more specifically that it was the Community Reinvestment Act, passed in 1977 to encourage local lending institutions to lend to low and moderate-income and minority homebuyers, that effectively compelled such lending institutions to make riskier loans, or that the practice of subprime lending itself is alone responsible for causing the current crisis.
Yet the ultimate systemic causes of the current financial crisis can be traced to multiple perverse incentives or moral hazards created by the regulatory structures for mortgage lenders, mortgage brokers, investment banks, credit rating agencies, and other market players in the early twenty-first century. In particular, the current crisis can be largely attributed to the gradual replacement of a relatively “horizontal” mortgage lending system (in which the lender qualified the borrower, ascertained the value of the property, issued a mortgage, and collected the monthly payments) with a much more “vertical” mortgage lending system- in which government-sponsored enterprises (such as Fannie Mae and Freddie Mac) led to a liberalization and geographic disconnectedness of lending practices. In this newer mortgage lending system, a host of privately-held entities- from mortgage brokers to loan servicers to credit rating agencies- quickly found that they could make handsome profits by disconnecting and then specializing in small parts of the overall lending process. While certain players in this market, such as mortgage brokers, were paid when deals were closed, and thus rewarded chiefly upon the volume of transactions they processed, other players, such as investment bankers, were rewarded based upon the growing demand for their ability to create and issue mortgage-backed securities whose rates of return were often higher than those of other, more traditional investment vehicles such as stocks and bonds.
Further, there have been numerous missteps by key federal agencies that regulate lending and financial services- especially the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC), and shortcomings in key federal legislation governing home loan and home equity transactions, such as the Truth in Lending Act (TILA), The Real Estate Settlement Procedures Act (RESPA), and the Home Owners Equity Protection Act (HOEPA). [Way too much detail to include in a blog comment...]
There is also a question of federalism: – i.e., whether the federal government or the states are in a better position to regulate predatory lending and other undesirable behaviors in the mortgage lending marketplace.
In Georgia, a state with relatively weak bank chartering requirements, the combination of of easy entry into the banking marketplace and lax federal oversight has proven to be disastrous. A GSU Law student who works for the FDIC notes that of all the federal agencies in Georgia, only the FDIC has a significant percentage of employees currently working during all 7 days a week- a sad reminder of the bank takeovers for which there seems to be no end in sight.
I heard on NPR (I think) that the credit agencies who were rating the mortgages were giving the triple A ratings to many of these mortgages and were not even looking at them. Then Fannie Mae and Freddie Mac were buying them up based on the rating of the mortgage without checking them as well.
I like the idea of changing the value of the house to equal its current value. Do you have the Senator who sponsored the bill and the S.R. number?
The Senate Bill (SB 61) was sponsored by Dick Durbin (D-Ill). The bank lobbyists exercised some serious leverage on the Hill. It was the second time in two years that the measure died. It was supported by Obama, but that does little when the banks are major congressional contributors.
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best regards, Greg
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