Tag: regulation

Don’t forget about fiscal literacy

Posted on by Evan in For Professionals, Housing & Real Estate, Miscellaneous, Personal Finance, The Fed

The NY Times published a good article today outlining the presidential hopeful’s views on financial regulation (click this link to view).  By the sounds of it we can expect greater governmental oversight over the financial markets in the coming years.

It is no surprise that a reaction for greater financial regulation has resulted following the third financial collapse in as many decades.  In the 1980s the savings and loan crisis forced 747 financial institutions to fail.  In the 1990s it was the dot-com bubble that burst wiping out approximately $5,000,000,000,000 ($5 trillion) in market capitalization in only 2 years.  Currently, we find ourselves in the largest credit & housing expansion and downturn in US history (the extent of the housing cycle is creatively displayed in this video by John Burns).

In each instance the pattern of activity tends to be similar.  At first a small group of people begin to acquire an asset (i.e. stock, house, mortgage-security) and that asset class performs extremely well over a short period of time.  Word spreads that this particular asset class is a great investment and more and more people get involved.  So on and so forth until rationality has left the marketplace and folks are buying up the asset left and right without any regard to the actual fundamentals behind the investment.  Along the way enterprising and dishonest salesman find ways to “help” less educated and less sophisticated buyers get into the game.  Around this time is typically when the music stops and those left holding the asset are the ones who lose huge.

To a degree this explains how each of the aforementioned economic bubbles have occurred.  Many people have blamed the period of deregulation in the financial markets from 1970-2000 for allowing so many people to get into financial trouble.  If this is indeed the cause then it would only make sense to have the government tighten down on the financial markets.  It is no surprise then that the two presidential hopefuls are proponents of this approach as is Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. 

Although I do agree with these people that some additional governmental regulation would be helpful (so long as it is actually enforced) I think the greater preventive measure lies in our education system.  For me this period in our history is only partially about lack of government oversight and is more about lack of fiscal literacy among consumers.

The Economist wrote an excellent article about fiscal literacy which I posted on my blog back in April (view it by clicking this link).  My hope is that the presidential nominees will spend time this fall talking about ways to improve our national education system so that in the future consumers will be able to ask informed questions, properly analyze their options, and make quality decisions regarding their financial matters.  Otherwise we may find ourselves in this position again next decade. 

WSJ reports on “Paulson Plan”

Posted on by Evan in For Professionals, General Mortgage Info., Housing & Real Estate, Miscellaneous

The WSJ reported this morning that Treasury Secretary Hank Paulson will unveil an overhaul to the regulatory system for the financial markets on Monday. This should be very interesting. One of the provisions in the article calls for a Federal system for state monitored mortgage companies.

Here is the article:

Sweeping Changes in Paulson Plan
By DAMIAN PALETTA
March 29, 2008

WASHINGTON — U.S. Treasury Secretary Henry Paulson plans on Monday to call for sweeping structural changes in the way the government monitors financial markets, capping a broad review aimed at revamping a system of regulatory oversight built piecemeal since the Civil War.

If all the changes get made, they would represent a complete reworking of the U.S. regulatory system for finance. Such an outcome would likely take years and would also require major compromises from an increasingly partisan Congress. The proposal, obtained by The Wall Street Journal, is likely to trigger messy feuds over turf at a time when confidence in government supervision is low.

Even so, the blueprint could be a guide for future action. Senior Democrats have expressed in recent weeks that they also believe the regulatory system should be overhauled, potentially paving the way for possible deals.

Mr. Paulson’s plan will include merging some agencies, such as the Securities and Exchange Commission with the Commodity Futures Trading Commission, while broadening the authority of others, such as the Federal Reserve, which appears to be a winner under the proposal. Mr. Paulson is expected to recommend that the central bank play a greater role as a “market stability regulator,” with broader authority over all financial market participants.

Mr. Paulson is also expected to call for the Office of Thrift Supervision, which regulates federal thrifts, to be phased out within two years and merged with the Office of the Comptroller of the Currency, which regulates national banks. One reason is that there is very little difference these days between federal thrifts and national banks.

The Treasury plan has been in the works since last year but has taken on greater prominence since the onset of the housing crisis and ensuing credit crunch. Critics have blamed lax regulation at both the state and federal level for exacerbating the crisis.

A key part of the blueprint is aimed at fixing lapses in mortgage oversight. Mr. Paulson plans to call for the creation of a new entity, called the Mortgage Origination Commission, according to an outline of the Treasury Department’s plan, which was first reported by the New York Times. This new entity would create licensing standards for state mortgage companies. This commission, which would include representatives from the Fed and other agencies, would scrutinize the way states oversee mortgage origination.

Also related to mortgages, Mr. Paulson is expected to call for federal laws to be “clarified and enhanced,” resolving any jurisdictional issues that exist between state or federal supervisors. Many of the problems in the housing market stemmed from loans offered by state-licensed companies. Federal regulators, too, were slow to create safeguards that could have banned some of these practices.

Mr. Paulson is expected to repeat his assertion that the Fed should have much more access to information from securities firms and investment banks that might borrow money from the central bank.

Presently, insurance is regulated on a state-by-state basis, but the Treasury review is expected to call for the creation of an optional federal insurance charter that would be overseen by a new Office of National Insurance. Such an idea has been floated for years but never directly endorsed by Treasury.

In addition to some of the short- and medium-term changes, Treasury officials have also designed what they believe to be an “optimal structure” of financial oversight. It would create a single class for federally insured banks and thrifts, rather than the multiple versions that now exist. It would also create a single class of federally regulated insurance companies and a federal financial-services provider for other types of financial institutions.

A market stability regulator, which would likely be the Fed, would have broad powers over all three types of companies. A new regulator, called the Prudential Financial Regulatory Agency, would oversee the financial regulation of the insurance and federally insured banks. Another regulator, the Business Regulatory Agency, would oversee business conduct at all the companies.

New appraisal rules to come?

Posted on by Evan in For Professionals, General Mortgage Info., Housing & Real Estate, Mortgage Qualification

This is pretty big news for our industry:
http://online.wsj.com/article/SB120456185094007821.html?mod=hps_us_whats_news

The article linked above indicates that we could see huge changes in the way property appraisals are conducted in the future. Essentially, Fannie Mae & Freddie Mac, who ultimately dictate guidelines for a majority of mortgage financing, are agreeing to change the way in which mortgages are ordered in our industry.

Currently, the loan originator who is compensated when the loan is originated and has no liability for the loan if it performs poorly, is the party who orders the appraisal. Furthermore, typically the appraiser is only compensated when a loan closes. Therefore, the incentive system currently in place leads to pressure on appraisers to come up with value to make deals work. Undoubtedly this has led to fraud and the “stretching” of values in certain instances over the past couple years.

However, the impact of this agreement could mean longer turn times for processing loans as well as higher costs to consumers. The reason? I’m not sure how Fannie and Freddie propose to create a clearing house for appraisers but I have to believe that centralizing such a task and maintaining efficiency will end up being a major challenge.

The timing of this agreement is not surprising. As I’ve mentioned in past posts regulation and rule changes always seem to commence when the “crapt hits the fan”. As banks and investors count their losses for foolish loans made over the past couple years they answer by putting rules in place to restrict these practices in the future.

My answer to all of these problems would be something a little different. I think it would be best for banks and lenders to find a way to tie the loan originators compensation to the long-term performance of the loans they make.