Is the Financial and Mortgage Industry Smart Enough to Recognize the Lifeline Obama Has Thrown It?
Normally dour Larry Kudlow had a funny, telling line on CNBC yesterday. Responding to news that a bankers association had put out an economic forecast calling for recovery in the 3rd quarter, Kudlow dryly noted that if the forecast was accurate, "the banks will be right about one thing in a row."
The financial services sector has been jaw droppingly wrong on many things during the course of the financial crisis -- especially, to Alan Greenspan's infamous "shocked disbelief," when their own self interest was at stake.
If the banks and financial services industry oppose the Obama financial overhaul , the track record will remain untouched. The reflexive reaction of the industry to push back against any regulatory action is in full force (see this foaming at the mouth reaction). But a closer look at the Obama plan reveals that the proposed overhaul is, by and large, in the best interests not only of consumers of financial products, but the financial companies themselves, their shareholders, and investors.
1. Confidence Is King: Recovery of the financial markets has been prolonged by a failure of confidence among investors and consumers. The mortgage markets remain shut down, absent an on-going huge transfusion of capital by the federal government. Trust in the ratings agencies has evaporated. We should take it as a sign when Chinese students laugh down the US Treasury Secretary's assertion that assets held by American institutions are safe -- they are the next generation of international investor. Meanwhile, consumer lack of faith in banks is at an all time low, with a recent survey finding only 9% of US and UK borrowers expressing confidence in financial institutions.
How Obama Plan Addresses: The Obama Plan lays out a series of steps designed to restore investor and consumer confidence. The securitization process -- which went seriously awry with the off-loading of risks of garbage products -- gets rebooted. For the first time, loan level data must be disclosed to ratings agencies and investors -- not only at the issuance of the security, but on an on-going basis so that investors can track the actual performance of the underlying loans (a process known as surveillance, pioneered by companies like Clayton Holdings). Ratings agencies will be subject to tighter conflict of interest rules and improvements to the integrity of the ratings process. On the consumer side, the proposed Consumer Financial Protection Agency would mark the separation of consumer protection from safety and soundness banking regulation. Consumer protection has typically been on the backburner of the banking agencies, as evidenced by the Fed's after-the-fact discovery of a subprime problem. If an enhanced consumer protection regime is the price of regaining borrower trust, it will be worth it for the struggling financial industry.
2. Standardization and Uniformity: The financial services industry is notoriously subject to inconsistent and conflicting regulatory requirements from a number of agencies. For example, the rules governing mortgage closing are administered by HUD and the Fed (Truth in Lending Act, and Real Estate Settlement Procedures Act) and have resulted in a situation that benefits neither lenders nor borrowers, as HUD Secretary Donovan recently noted. The cost and burden of compliance of these conflicting requirements is enormous.
How Obama Plan Addresses: The plan would integrate regulation for the Truth in Lending Act (TILA), Home Ownership and Equity Protection Act (HEOPA), Real Estate Settlement Procedures Act (RESPA), Community Reinvestment Act (CRA), Equal Credit Opportunity Act (ECOA) and Home Mortgage Disclosure Act (HMDA). By creating a "one stop shop" for mortgage and finance regulation, the CFPA can help bring coherence and rationality to a regulatory system that today is fragmented and difficult to comply with.
3. A Level Playing Field for All Financial Players: The fragmentation of regulatory authority in today's system sometimes creates competitive disadvantages for financial industry participants. Identical products may be subject to different regulatory requirements, depending on who regulates the lender, leading to confusion for consumers and unfairness for lenders.
How Obama Plan Addresses: The plan would "ensure that banks, nonbanks, and independent mortgage brokers all play by the same rules", with a mandate for the CFPA to "write rules across bank and nonbank firms for a level playing field". We can't remember a prior instance of the federal government paying heed to a "level playing field" for the financial services industry.
4. Plain Vanilla Rules for Plain Vanilla Products: One of the absurdities of today's system of regulation is that the level of disclosure and restriction is the same for a relatively simple financial product like a conforming 30 year fixed loan as it is for an "exotic" product. That traditional system serves neither borrowers -- who can be inundated with voluminous but not necessarily meaningful disclosures for simple products, while not getting enough transparency on complex financial products-- nor lenders, who bear the costs and burdens the system.
How the Obama Plan Addresses: Obama economic advisor Michael Barr pioneered the application of "behavioral regulation" to mortgage and consumer finance lending. Many of Barr's concepts have found their way into the Obama plan. The CFPA would have authority to define standards for "plain vanilla" products that are simple and have straightforward pricing -- significantly easing disclosure standards for the vast majority of products. Lenders could offer more complex products, but the disclosure would be commensurate with the complexity -- a novel approach that stands to benefit lenders and consumers.
5. Obama Plan is A Politically Moderate Approach: The Obama plan is far from the radical restructuring of markets or imposition of "command and control" regulation that many in the finance industry feared. If anything, the plan is notable for what it does NOT do:
- The plan does not revamp the credit rating agency business model (i.e. to an investor pay model)
- Does not create a "super regulator" for systemic risk
- Mutual fund regulation stays at SEC, not the new consumer agency
- The plan does not create federal insurance regulation
- The plan does not attempt an overhaul of Fannie Mae and Freddie Mac
Generally, the plan is more "course correction" than a top-to-bottom shakeup of financial markets. The plan is not without cost and not without flaws -- it will and should be refined and improved during the legislative debate to come. But the overall proposal is helpful to the stability of financial services industry and the confidence of investors and borrowers -- without turning the banking and financial world upside down. The question is, does the industry know a good deal when it sees one?
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This commentary solely reflects the views of The Glaser Group, a financial services and mortgage industry consulting firm.
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No, they are not. They are still arrogant and don't want anyone telling them what to do, until they need to be bailed out.
To answer your question are they smart enough to recognize the hand that's being offered them to get the momentum going for the home indusrties again???
NO.
.
This is a good synopsis of the regulations. I like this format: problem - solution. I also like that the author points out that this is a first draft and we're going to go through six months of debate at least before there's a finished product with capital requirements and systemic oversight.
I haven't made it all the way through the regulations yet. They're complicated and it's hard to think about what implications they have because this is really a big change. I'm astounded at the thousands of brilliant people on this website that have already been able to digest them and proclaim them an abject failure so soon.
As a general statement, Howard, I agree. Many details are left to be worked out, but I feel that the LEGITIMATE industries of banking, finance, and insurance (and "never the twain shall meet...") have been buried under the debris of this CRIME such that it cannot hope to emerge until that CRIME is stopped.
A true businessman understands implicitly that "what is good for my Customers is by definition good for me." You don't steal candy from a baby. You don't steal thousands of dollars from every one of your customers and book it as a $14 BILLION "income" entry on your annual report (this was BofA... and very typical) and say, "Oh, What A Good Boy Am I." You don't gamble with other people's money and if you were wise you would not be gambling with your own.
These are not true businessmen. They're in the Captain's chair of a byzantine contraption that they loudly proclaim is "too big to fail," but they wouldn't know the business of any of the "businesses" they're supposedly in, if it hit them in the face. We must outlaw their practices, take away their keys, dismantle their contraptions, and allow the many thousands of businesses who DO know how to prosper ... to do so.
See Howard Glaser's Profile
Yep, that is the heart of the problem, Sundial. We see this irrationality in many ways. The foreclosure crisis presents another a good example: banks have done a very poor job of managing distressed properties by botching the short sale process. Rather than take a relatively small loss by approving a sale between a willing buyer and seller at less than the mortgage value, lenders will let the sale lapse and be stuck with the foreclosed property -- at a 50% loss. This piece from NPR tells the story well - http://minnesota.publicradio.org/display/web/2009/06/01/short_sales/. hg
I experienced this first hand when in the market to buy our first home a year ago. "Short sale" is a misnomer; it should be "Slow & Painful" sale. In the end we ditched the short sale house, avoided other short sale properties and purchased through a regular transaction. The home we originally bid on is still on the market today. The banks do themselves no favor by turning off willing buyers.
Anything that the President does, it is going to be bad, period. The entire Republicant block want him to fail, so that they can get back in power to continue to deregulate and give her buddies more tax cuts for the rich. That is their only interest. When this bill gets through Congress and Senate, we won't recognize the bill at all, for they will destroy it.
Instead of a overhaul, why not a return (with modern modifications) to banking as it was in this country 25 or 30 years ago. (Banking and brokering and insurance were separate and ti worked well!) A return to banking as taking in deposits and makings loans. Boring, but real.
Right now we even have housing builders who are also mortgagee companies, who appraise the value of their own projects to then lend (with lots of fees) lend to consumers to buy their homes. This is a racket and one of the roots of the rot. Not even being addressed by this legislation.
Because the regulations that were in place at the time were overturned by Congress.
So it all has to be redone, and since it all has to be redone, why not make some corrections to it?
But then everybody's beloved mark-to-market wouldn't be forces on security valuation.
...forced on security valuation. I always do that.
I think it would make sense to force lending institutions to hold a significant portion of their paper for a significant time.
I was a sub-prime broker up until the end. The biggest problem I saw was that the wholesale mortgage companies I did business with only held their own loans for 1-3 payments. After that short a time, they sold the note off for 102-104%.
Over the years, underwriting became more and more a test of initial payment probability rather than an unbiased overview of the risk of the paper.
Unfortunately, that seems to be typical of many industries -- focus on next quarter's & this year's profits & don't worry about 5 years from now. That was likely to be someone else's problem because the people making the short term big profit cashed out & left that industry to go & plunder another.
A lot of that comes back to finance. We should put limits on leveraged buyouts. Sort of like a mortgage. The buyer should have to meet capital requirements and put down maybe 15 or 20% in their own cash. Fancy finance has caused major problems.
Internationally, a lot of good manufacturing firms like Toyota have executive pay scales tat are much lower than those in the U.S. Those executives come from within the company. The company focuses on the long term. This issue isn't new. The short term focus of a lot of American companies was obvious by the '70s and '80s.
A lot of the problem can also be traced to American business schools. AN MBA to improve skills and teach basics is fine but companies should foster talent. MBAs who come out of school with little experience and big ideas are dangerous. The term flash in the pan comes to mind.
We need long term focus. And a good dose of patriotism and ethics while we are at it.
Wall Street may try working another legal scam so we need very smart and tough regulations to prevent it. I will tell you what you already know this cost us trillions because of the frauds of the rating companies, sub prime, dirivitives,
Most bank officers were told they had to make loans they knew were bad to begin with. There is proof of this and it is not hidden. In many cases board memebers of banks promoted this because of ther conflict of intrest working on wall street and this is a massive part of the trillion we needed to bail out.
Here is the joke when a known fraud happen and no one goes to jail it is a joke to wall street and yes making loans on homes that you knew were bad but ordered to do it is a real fraud. Anything they do is a joke unless laws with real teeth will be in place for those who break the law and go to jail.
Just think of this a Country our forfathers and others fought for and laws that can be broken and bring down America without prosecution.
We are heading for the same but with a new twist because wall street will never learn
Wow. Imagine that a game of financial musical chairs doesn't work out well. Here's a question, though. WHY DOES NO ONE MENTION THAT THIS IS ALL SECURED DEBT? The real estate EXISTS. This is no emperor's new outfit. This bubble has a solid center. Shouldn't that build confidence?
And on that note, why can't the banks simply offer to take back properties from borrowers who can't make payments and hire management companies to lease/rent them out? Perhaps to the current borrowers (if they are able)? That way, there is no drain on either the banks or the former "owners". The banks "win" and the people who live in these homes can stay, paying rent instead.
There are several companies, starting in Massachusetts I think, who are doing just that. They buy the mortgages they can buy and work out terms with people being foreclosed on or offers a lump sum and moving expenses.
Yep, these experts are what got this country into this shape in the first place!
Nope, these folks are not smart enough to see a lifeline when handed to them on a silver platter!
This may very well be my one and only post, mostly because I will no longer have internet access after tomorrow. My phone was shut off today and my house will go at any given time.
I am fifty-freakin' years old and have struggled all of my life. I am very tired and I am extremely tired of the whiny folks running the mortgage and financial industries, the health and medical industries, while they are buying airplanes and spending taxpayer dollars like it is there own and the rest of us that are the true backbone of this country are working our asses off and getting screwed at the same time!
I'm so sorry that you have been caught in this mess. Marian, please don't give up.
Marian I lost my phone and internet so now I have a router cost under $50 so I surf for internet and now I use magicjack for a phone thru my internet. which only costs me around $20 a year for my phone includes long distance and if I lose my house as well I can take my phone anywhere I go.
I was so hopeful things would change with the bankers and wall street. I really thought Obama was going to shake it up and change things.... but was so wrong. I think the president has good intentions but the senate won't let anything thru so I throw my hands in the air and say I give up, our country is corrupt and selfish. i couldn't be more disappointed in our politicians than I am today.
like some of the suggestions, esp consolodation & increasing complexity of regulations for increasing complexity of financial instruments..
but summers/geitner are foxes guarding the henhouse. and the increased role of the fed .. fed needs to be audited ASAP
more details, see following paper--
endorsed by two phd economists. printed in nexus
magazine, 60k world circulation. #1 top downloaded
economics paper. used by economics
teacher in australia as standard classroom material.
"fractional reserve banking as economic parasitism"
http://econpapers.repec.org/paper/wpawuwpma/0203005.htm
recent supporting material:
The Quiet Coup by Simon Johnson
http://www.theatlantic.com/doc/200905/imf-advice
Ron Paul-- HR1207 to Audit the Fed
http://www.ronpaul.com/on-the-issues/audit-the-federal-reserve-hr-1207/
Web of Debt-- How Banks and the Federal Reserve Are Bankrupting the Planet
http://www.webofdebt.com/
Shock Doctrine: Naomi Klein on the Rise of Disaster Capitalism
http://www.democracynow.org/article.pl?sid=07/09/17/1411235
Confessions of an Economic Hit Man: How the U.S. Uses Globalization to Cheat Poor Countries Out of Trillions
http://www.democracynow.org/article.pl?sid=04/11/09/1526251
John Perkins on "The Secret History of the American Empire: Economic Hit Men, Jackals, and the Truth about Global Corruption"
http://www.democracynow.org/article.pl?sid=07/06/05/149254
Wow! Erased my previous comment...guess criticizing President 'Not-as-Progressive-as-He-Appears' is out....
Anyway I want to complement you on your comment. Lot's of good stuff there...
Even if Obama is nothing more than an empty suit the rest of us must press on to a...
...brighter day.
If nothing else the populace is no getting that education about economics that they missed in school.
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