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Is More Mortgage Regulation Really Bad for Lending?

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Claim of “too much regulation” have emerged as a major election issue with leading candidates telling us we must have fewer government rules. It's a great argument but what do the facts say?

A major point of contention is Dodd Frank, the 2010 Wall Street reform legislation which is publicly detested in the lending community. In reality, the Dodd-Frank Wall Street Reform and Consumer Protection Act has been a boon to lenders.

Regulatory Uncertainty
There's a lot of discussion regarding the idea of “regulatory uncertainty,” the thought that businesses will not expand unless they are sure about the regulatory climate. This is a curious argument given that we have more regulatory assurances today with Wall Street reform than in the past.

The best example concerns the Home Ownership Equity Protection Act. Under HOEPA the Federal Reserve has the right to ban “unfair and deceptive acts or practices” in the lending industry. But when “non-traditional” loan products such option ARMs and no-doc mortgage applications began to be widely marketed from 2002 through 2007 the Fed did nothing. Had it used the authority it had then there would have been no financial meltdown because the marketplace would not have been flooded with toxic loans.

The “regulatory uncertainty” in this case was that the Fed refused to enforce legislation which was on the books since 1994. As former Fed Chairman Alan Greenspan reluctantly admitted to Congress, "those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief." (parenthesis his)

Foreclosures
The natural and unsurprising by-product stemming from the widespread marketing of toxic loan products was a massive number of foreclosures, short sales and REOs. Traditionally the foreclosure rate was less than 0.5 percent annually before the mortgage meltdown, even in periods of high unemployment.

But now, two years after the introduction of Wall Street reform, guess what? Foreclosure levels are below pre-crisis levels.

“Loan performance over the past decade shows the 12-month default rate averaged just under 0.4 percent of mortgages in 2002 and 2003, which is considered normal,” said Lawrence Yun, chief economist with the National Association of Realtors. “Twelve-month default rates peaked in 2007 at 3.0 percent for Fannie Mae loans and 2.5 percent for Freddie Mac loans, clearly showing the devastating impact of risky mortgages.”

And what about lately?

“Since 2009,” says Yun, “the 12-month default rates have been abnormally low. Fannie Mae default rates have averaged 0.2 percent while Freddie Mac’s averaged 0.1 percent, which are notable given higher unemployment in the timeframe.”

Lender Profits
You might think that lenders have suffered terribly under Wall Street reform. That just isn't the case. Profits are up – and up a lot.

Independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $2,152 on each loan they originated in the second quarter of 2012, according to the Mortgage Bankers Association. And what about profits in the second quarter of 2010, just before passage of Dodd-Fank? Back in 2010 profits per loan were $917 – less than half what they are in 2012.

How about that? Despite all the complaining it turns out that the biggest “problems” with Wall Street reform are fewer foreclosures and larger profits.

Related News
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Why the Silence on Housing?


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