A recent New York Times article addressed the fact that lenders–represented by the American Bankers Association, the Mortgage Bankers Association, and the Independent Community Bankers Association–have been lobbying hard to limit proposed rules that would curb certain lending practices and require greater disclosures.
This should come as no surprise; we’ve seen it before. In the early years of the S&L crisis, more stringent rules were proposed by some regulatory agencies, and that industry lobbied long and hard to rein them in.
In the pro-deregulation climate of that time, they won, and the result was a series of regulatory moves that were intended to allow thrifts to earn their way out of the hole they were in, rather than letting them fail.
The result? A financial crisis that lasted longer, and cost taxpayers more, than it otherwise would have. Sometimes, your first loss is your best loss.
A Cornerstone Of Criticism
A cornerstone of mortgage lenders’ criticism of tighter standards now, at a time when credit is scarce and mortgage spreads are at their widest levels since before there was really much of a secondary mortgage market, is that tightening lending standards would make mortgages more expensive. To some degree, that’s the entire point.
For too long, credit was too easy, and loans were too cheap. Mortgage spreads had narrowed too much to compensate for the credit risk. Lenders didn’t care about the risks they might be passing along, as long as they weren’t left holding the bag.
Wall Street buried the risks in an alphabet soup of structured products so arcane even the firms that created them didn’t understand the risks of the pieces they held onto–which have now been written down some $200 billion to date.
And investors were happily–and greedily–chasing too-good-to-be-true yields, ignorant of the risks, as is too often the case when a bubble is inflating.
The Game’s Afoot
Now, the birds have come home to roost, and with apologies to Staples, everybody wants an “Easy Button.” People who bought more home than they could pay for–the vast, vast majority of them knowingly–want a government bailout, so they can keep living in a house they can’t truly afford.
That’s the point of rates being higher–they shouldn’t be held artificially low by an overly aggressive Fed, a market that misprices risk, or lax regulation that keeps lending costs down, but at a dear ultimate price to the broader economy.
Wall Street wants a bailout, too, and at least one Street firm, the formerly venerable bond house Bear Stearns, got one (although at the cost of its once-fine reputation, as Bear is now the laughingstock of high finance).
And lenders want a free pass on tighter standards that, while not a solution for the current crisis, could prevent a future one. That shouldn’t happen, any more than the bailouts of borrowers and Wall Street should.
That the Fed would propose a tighter set of lending standards is understandable. After all, that institution so widely missed the mark in failing to foresee–or forestall–the housing bubble and its aftermath, it should be embarrassed. In 2005, at the height of speculative frenzy, then-Chairman Alan Greenspan testified before Congress that rapidly escalating home prices did not constitute a bubble, but “froth.”
Indeed. Froth can be defined as a mass of bubbles, which–given the fact that in 10 of the 20 markets included in the S&P/Case Shiller Index, home prices are now lower than they were when Greenspan made the comment–sounds about right. Greenspan’s successor, current Chairman Ben Bernanke, was in denial as to the severity of the housing crisis until last August, when the credit markets imploded.
On the other side of the equation, critics assert that the rules aren’t stringent enough. They argue that the plan only covers future mortgages, not existing loans. Well, it’s pretty hard to require more disclosures and tighter standards on loans that have already been made.
Watering Down The Rules
Ultimately, lenders will likely succeed in watering down the rules, as was the case with the thrift crisis. They’re likely to win key points such as avoiding tighter rules for Alt-A loans, which they argue are made to more creditworthy borrowers than subprime loans–but which have proven to perform like subprime credit when home prices fall and rates reset.
They’ll also probably win on having to make more disclosures, but not banning certain practices, such as tying compensation to the cost of credit, which led some lenders to steer otherwise creditworthy customers into more exotic loans.
And that’s a shame, given the large numbers of subprime borrowers who paid no attention to the disclosures they received regarding the rate resets on their low-teaser rate ARMs.
As we ride “once more into the breach,” mirroring the mistakes that escalated the S&L crisis, we’re reminded of the wisdom of the Georges quoted below.
Brian Hague is CEO of CNBS, Overland Park, Kan. For info: www.cnbsnet.com. (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com http://www.sourcemedia.com