Will We Fence in the Mortgage Industry or Not?

The financial reform bill is on the brink of passage, or not, as the case may be. After working together for months, the House and Senate finally came up with some new rules, 2,000-plus-pages of them. All they have to do now is decide whether to pass it. Their stated goal is to ensure that never again will we see another crash like the one that sent us into a tailspin and the worst recession since the Great Depression. But I’ve been watching lawmakers for a while, and I’m not quite sure about that. My feeling is that the new Financial Reform bill will pass through Congress and be signed into law by President Obama and its primary impact, from a future historical point of view, will be to guarantee the next boom and bust cycle occurs right on schedule. Business as usual, in other words. But in the meantime, savvy lenders that can afford to hire compliance attorneys should do just fine. My analysis returns this result because when comparing the scope of the problem to the length of the law, I find that it is written to be circumvented. If I haven’t lost you already, I’ll explain. Laws are like boundaries. They delineate what society has determined is right from wrong. Think of them as fences. The stronger the law, the less likely it is to be circumvented legally. Strong laws are short. The law that most people of the Judeo-Christian world follow relating to murder is a case in point: “Thou Shalt Not Kill.” Four words. No gray area. The law doesn’t say, “Thou shalt not kill, unless your adjusted gross income from line 28a exceeds the alternative minimum income derived from the worksheet on page 457.” It just says don’t do it. It doesn’t even go into the consequences for violating the law. Everyone just knows that if you kill somebody, you’re responsible for the next bailout, i.e. you’re screwed. A law like “Thou Shalt Not Kill” is like a fence made out of a solid wall of iron. You can climb over it or dig under it, but then you’re clearly circumventing the law, not avoiding it, and there shall be consequences. There can be no avoiding them. A good law is like a good fence. It let’s people know where the boundaries are and keeps them honest. A good law might say: if you make income, you shall pay 15% of that income to the government for valuable services said government may or may not choose to render unto you. That’s like a high wooden wall. You can still burn it down by sending in a lawyer to quibble over the definition of “income” or “render,” but it’s still pretty solid. And you could engrave it easily on a stone tablet, if you had a mind to. The library of current IRS regulations, on the other hand, is like a chicken wire fence, made out of Twizzlers, and not the fat ones. Lawyers can easily chew their way through the tax code. There is an army of U.S. attorneys that do nothing else. They do quite well for themselves, I understand. That’s why special interests hire attorneys to draft new legislation. They make chicken wire fences. While legislators spend months worrying over this patch of fence of that patch of fence, they don’t seem to realize that regardless of how big they build it, it will still melt like a Twizzler in the hot sun of the work-a-day world. So, lenders should take heart in the fact that the final result of months of political bickering is a document of this size. They should think of it as a book of opportunity. Actually, they should feel a bit short changed. When Clinton got screwed in the White House, the government generated 50,000 pages in an attempt to impeach him. When the rest of us got screwed in the bailout frenzy, all we got was a thousand page bill. Well, we do what we can with what we have. That’s what my mother used to say. In this case, I suspect we’re going to be able to do quite a lot. Rick Grant is veteran journalist covering mortgage technology and the financial industry. Follow him on Twitter: @NYRickGrant