I have strongly supported proposals to increase mortgage lending standards, on the theory that higher standards are necessary to restore borrower and investor confidence, and will contribute to long term stability in the mortgage market (see my post here). But buried in the enormously complex administration, Frank and Dodd regulatory reform bills are terribly drafted provisions which will strike a death blow to "Main Street" lenders and hand over a multi-trillion dollar mortgage market to a few large financial institutions. Ironically, for legislation designed to reduce systemic risk, the proposals will concentrate the mortgage finance system beyond anything that has occurred in the market during the past 50 years. Indeed, federal policy during the past year's intervention has already favored the "biggest of the big" -- today 60% of mortgage lending is controlled by just 4 mega-banks. The pending legislation will drive that total towards 100% in a very short time, as the non-bank community lending industry would collapse overnight.
The provisions -- blandly referred to as "risk retention" -- are driven by a laudable desire to ensure there is "skin in the game" in the finance system -- to ratchet back the indiscriminate shifting of risk which undeniably contributed to the mortgage meltdown. A fine enough goal. But bearing the brunt of this particular bullet are those community based lenders who never did toxic mortgages, wrote liar loans, or steered borrowers into unaffordable subprime products. While Wall Street turned the mortgage market into the Wild West, "Main Street" mortgage lenders stuck with traditional, conventional loan products with familiar terms. And they suffered for it, as market share flowed to the highest risk products peddled by investment banks through captive originators, and sold to investors with little disclosure of the real risks. In the wake of the meltdown, as one toxic lender after another closed its doors, the Main Street lenders kept the doors to the mortgage market open, and have helped the housing market regain its footing -- even as TARP funded mega-banks pulled back.
Main Street mortgage lenders didn't expect to be rewarded for sticking with plain vanilla lending. And they never stuck their hands out, even while the Wall Street funds and mega-banks that created the mess pocketed TARP funds to fatten their balance sheets. But still, in talking to local lenders around the country I can tell you they are shell shocked to now find themselves offered up as the sacrificial lamb for the sake of a talking point on "risk retention."
To fight for their collective lives, Main Street lenders have formed their own advocacy group and for the first time are trying to have a voice in Washington. While they can't match the $250 million that large financial institutions have spent to lobby Washington this year, local lenders hope that a grassroots effort might convince enough members of Congress not to shoot the Main Street lender for the sins of Wall Street.
My Disclosure: I am serving as a pro-bono advisor to the community mortgage lenders, many of whom are friends I saw struggle to maintain responsible lending standards even while the market went certifiably insane -- and who now face the loss of 20 and 30 year old community businesses.