Dodd Bill Draws Shallow Line in Shifting Mortgage Sands

In light of the recent passage of health care reform, a hard-fought battle that kept President Obama out of lame duck status, the financial stability and regulatory reform bill looks set for a similar battle. But that’s where the similarities end. The comparatively short 1,336-page bill on sweeping reforms to the financial markets, originally introduced by Senator Chris Dodd (D-Conn.), narrowly moved forward this week with the approval of the Senate Banking Committee. The vote to shift it to the floor went as expected, with all 10 Senate Banking Committee Republicans opposing the measure. The 13 Democrats who make the rest of the committee all voted in favor. However, concerns are emerging in the mortgage finance industry over the scope of the financial regulation that, while necessary, may be moving forward simply for the sake of moving forward. Indeed, there are so many points to argue on this bill, that this column could easily compete in page count. Let’s put the regulation into perspective: mortgage finance cannot regulate itself as the past few years showed, correct? Dodd’s legislation is meant to fix all this in one fell swoop, establishing a Consumer Financial Protection Agency, and offering changes to the regulation of credit ratings agencies, short-selling, derivative trading, and would require supervision of non-bank financial institutions, to name a few. Considering that distressed asset trading in the United States is now earning yields in some markets at 30% to 35% per annum, this country is quickly becoming the next EMERGING MARKET. Forget the housing bubbles in Shanghai or Mumbai. Or excessively yielding Greek sovereigns. This country is attracting investors from all over the world, and they are hungry for deals, both in real estate and in related securities. Dodd’s bill sits at the perfect nexus to draw a line, and to well-regulate the potential abuse these new players to the market conceptually may bring. The thing is, opportunistic or not, the bill simply won’t do this. One criticism is that the bill, in its form, will eventually become watered-down legislation. I was taken by today’s comments from Deputy Secretary of the Treasury Department Neal Wolin, speaking before the US Chamber of Commerce: “As the President has made clear, we will oppose efforts to weaken it,” and that “there should be no debate about one thing: a central cause of the financial crisis was a financial regulatory system decades out of date and riddled with gaps and loopholes.” But, even in its current form, the Dodd bill contains more waivers and exceptions than an insurance policy. In the case of supervision of non-bank agencies, the governing council can waive this mandated oversight. In the case of consumer protection, licensed real estate brokers appear to enjoy special waivers. As do accountants, lawyers, and many, many others. Even the date of such an agency becoming actualized is not yet settled. Lending practices considered abusive, by definition in the bill, are opaque and perhaps difficult to determine. For instance, the new regulator must prove that a certain lending practice actively seeks to capitalize on the borrower’s inability to make sense of what is being offered. A tall order. However, the so-called Volcker Rule remains largely intact. Named for a former Federal Reserve chairman, the rule forbids trading at banks across its own subsidiaries. Another section, numbered 164, prohibits managers from overseeing multiple bank operations. Good steps, both. Yet, from a secondary market perspective, the American Securitization Forum is continuing its call to further examine risk retention requirements, before passing a new law. In a statement of explanation, executive director Tom Deutsch said, “we are committed to restoring credit to Main Street and are particularly concerned that the 5% risk-retention provision in the current legislation will have the effect of severely limiting balance sheet and lending capacity over time.” He adds: “We are also concerned that any reform, including new accounting regulations, be coordinated so that it manages risk without materially restricting credit availability.” The Dodd bill seeks to coordinate all of these efforts, to be sure, but at the end of the day it will only draw a line in the sand too close to the tide water. Jacob Gaffney is the managing editor for HousingWire and HousingWire.com