Treasury Refutes Anti-Reform Rhetoric. Outlines Housing Finance Proposals

by devteam April 16th, 2010 | Share

Reformrnis coming,” according to a Treasury Department official who spoke thisrnweek to the National Policy Conference 2010 held by the Mortgage BankersrnAssociation in Washington, DC. 

MichaelrnS. Barr, Assistant Secretary for Financial Institutions, recapped eventsrnleading up to the collapse of the mortgage market and the economy, and gavernconference attendees some background on regulatory changes currently underrnconsideration.

Barr said that the country had a near catastrophernbecause “private risk-taking led to a race to the bottom unconstrained byrneither market discipline or government oversight,” and to a vicious cyclernof deteriorating standards in lending practices.  And nowhere, he said, was this more apparentrnthan in the mortgage market.

There were inadequate rules,rninadequate monitoring, and inadequate enforcement on all levels of the mortgagernmarket,” and the resulting unsafe practices appeared first among nonbankrnoriginators because that is where regulation was weakest.  However, independent mortgage lenders andrnbrokers did not act alone to relax standards. rnThey responded to a strong push from Wall Street which was in its ownrnrace to the bottom, generating increasingly vulnerable and ultimately foolhardyrnfinance products.  And here too, he said,rnlax and inconsistent oversight left the system open to this vicious cycle withrnsupervision fragmented over four different agencies.  This slowed responses to problems and invitedrnregulatory arbitrage, “and so the explosive growth of the less regulatedrnsectors of the housing finance system applied pressure on the regulated sector.

“Fannie and Freddie were eventuallyrncaught up in this destructive race,” he said.  They had lost their market share and madernpoor strategic choices trying to get it back. rnHe refuted claims that the GSEs collapsed because of the government'srnimposition of affordable housing goals. rn”Affordable housing goals did not drive the GSEs to the poorrndecisions that caused them to fail. rn(They) relaxed standards for the same reasons other market participantsrnrelaxed standards:  old-fashion greed andrnflawed regulation.”

Barr said that the path to housingrnrecovery will be painful and a stable and lasting recovery requiresrncomprehensive financial reform.  Reform,rnhe said “is about security for families in their savings.  It's about laying the foundation forrninvestment in our small businesses and entrepreneurs.  It's about promoting the growth we need torncreate jobs.  That is why each month,rneach week, each day; the legislation that will bring reform is gainingrnmomentum.  Reform is coming.”   

The Assistant Secretary said it isrnimportant to remember that the financial regulatory system today is virtuallyrnthe same system that allowed the race to the bottom and it still has the samerngaps and loopholes that allowed firms like Bear Stearns and Lehman Brothers tornbuild up excessive leverage and escape meaningful consolidatedrnsupervision.  “The key test of thernsufficiency of any reform proposal is whether it reduces the risk of races tornthe bottom; whether it substantially reduces the potential for regulatoryrnarbitrage and the incentives for regulators to lower standards.”

The President's reform plan, he said,rndoes that.

He said that claims that the Senaternbanking bill would lead to permanent bank bailouts are flatly false.  It explicitly mandates that a failingrnfinancial firm would be sold off, broken apart, and liquidated; that culpablernmanagement would be replaced, creditors would suffer losses, and shareholdersrnwould be wiped out.  By requiringrnassessments on the industry to recoup losses, the firms themselves, notrntaxpayers, would bear the costs when a firm fails.  The “Dodd” bill also limits thernFederal Reserve Board's emergency lending authority and specifically prohibitsrnits use to aid a failing financial company.

Barr said that rather than encouragingrnthe market to view some firms as “too big to fail,” the government,rnfor the first time, will have the authority to impose tough standards onrncapital, liquidity, concentration, and disclosure and will also have the toolsrnto wind down even the largest firms. rn”Chairman Dodd's bill ensures that no firm will be insulated fromrnthe consequences of it actions and no firm will be protected from failure.”

The President's plan also reduces thernrisk of races to the bottom in consumer protection, he said.  Under the current system seven differentrnfederal agencies have authority in the area and 15 times more money is allocatedrnto overseeing compliance with consumer laws by banks than by non-bank financialrnservice providers.  The new bill willrnestablish a single independent bureau with a clear mission of preventingrnabusive and deceptive practices and promoting transparency and consumer choice.  This will mean an end to the ability ofrnservices to shop for the weakest regulatory agency and it means the governmentrnwill be able to act much faster to address dangerous emerging issues such asrnsubprime teaser-rate mortgages.

He said that some people have questionedrnconsolidating oversight of mortgage origination with jurisdiction of otherrnnon-mortgage markets, but excessive credit card and auto lending fed anrnirresponsible wave of cash-out refinancing and home equity loans earlier thatrnhave left millions of homeowners under water. rn”We must build solutions that respect these connections amongrnmarkets and products.”

The third issue, Barr said, isrnregulating financial markets including derivatives.  The President's plan provides for strongrnregulation and transparency for all derivatives and standard ones will berncentrally cleared and traded.  Over therncounter derivative dealers and major swaps participants will be subject tornstrong prudential standards including capital and margin requirements.

Reforming the housing finance systemrnmust address what he called its ultimate instability.  The administration's proposals will berndesigned to achieve four objectives.

  • Mortgage credit should be availablernand distributed on an efficient basis to a wide range of borrowers.
  • A well-functioning housing market shouldrnprovide affordable housing options, both ownership and rental, for low andrnmoderate-income households.
  • Consumers should have access tornmortgage products that are easily understood.
  • The system should distribute therncredit and interest rate risk in an efficient and transparent manner thatrnminimizes risk to the broader economic system an does not generate excessrnvolatility or instability.

Barr concluded by saying that the urgencyrnof reform is increasing – not decreasing – as the crisis recedes.  “We have a choice to enact thernstrongest, most important financial reforms since those that followed the GreatrnDepression.  We need to get the job done sornthat our country can focus its full attention on healing the damage that hasrnbeen inflicted and building a sustainable economy for the future.


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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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