JAN 29, 2013

Related White Papers

Part 3: Technological Considerations for Leading in the New Mortgage Marketplace
Read Part 2: Changing Lender Process in the name of Consumer Protection
Part 1: Leading in a Changing Mortgage Marketplace
What We're Hearing

Crime and Lack of Punishment


WE’RE HEARING…makers of a PBS documentary believe regulatory officials should have done more to find executives involved in the massive mortgage-related securities losses taken during the downturn that they could successfully levy criminal charges against.

I came away understanding the frustration but also wanting to clarify that doing so is less important than implementing and enforcing reform of the system as a whole.

Sure, we all want to punish when things go wrong and we want what sounds like appropriate punishment. But a more disturbing point in the documentary that is not necessarily acknowledged and more of a priority is the fact that the problem was a systemic one.

Can you fairly punish or blame an entire system, and which part of the system do you single out?  

Certainly, groups like Occupy Wall Street and others have argued so that the sell-side securities market mentality in conjunction with lax mortgage underwriting between 2005 and 2007 are largely to blame.

But others like veteran Wall Street researcher and executive Mark Adelson tell us the causes are much more far-reaching and complex. And as one regulatory official grilled in the documentary points out, the ramifications of taking a sweeping enforcement action that could jeopardize a large financial system are enough to keep you awake at night. The documentary is dismissive of this point but I’m not.

What regulators should be blamed for is allowing this to occur on too large a scale, either because recent history shows existing rules weren’t sufficient or that they weren’t enforced well enough.

The latter is where the documentary’s main point holds some water. Identifying a “criminal” level of behavior and showing that one “can’t get away with it” has some merit. And the RMBS Working Group should live up to its promise to look into both criminal and civil actions, or do a better job of explaining why the latter are not as feasible as the former if indeed they are not.

But given that government resources are scarce, I think there need to be priorities, and for regulators this means putting an emphasis on preventing financial crimes going forward rather than retroactively.

When it comes to a systemic problem, reforming the system’s the main way to do this, and it needs to be done in consultation with the industry so that it’s feasible. These won’t and haven’t always been friendly discussions, but they don’t need to be completely adversarial either. Both should be aligned in wanting to avoid to the extent possible the kind of market-driven punishment suffered by consumers, the government and businesses during the downturn.

Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.

Comments (11)
The fact is, anyone or anyone company that chooses to pay a fine up front without going to court is prove of being guilty. Any Government entity willing to accept money in exchange of pressing felony charges is proof of being corrupt. The system is not complex, it's man made. Enough with excuses.
Posted by Adolfo | Wednesday, January 30 2013 at 9:37AM ET
For me, a few things are becoming clear in the years after - and with many eyes looking at - how things unfolded in the secondary mortgage market 2003 - 2009. 1. It is shameful how our political parties used this crisis for political advantage to the point where it interfered with fixing a major economic crisis and millions of people suffered. 2. No economic system or finacial approach is perfect or risk-free. So when talking about "systemic" problems, it seems ALL systems have them. You are trading one set of risks for another. So the objective is not to eliminate systemic risk, it is what do you set up that is the most practical and the one that can be managed? 3. For me, the rampant fraud and willfull neglect in the many different checks and balances throughout the system far outweighs the systemic faults. 4. ALL sectors had major contributions to fraud and willful neglect: - federal and state agencies in enforcement - Congress and Administrative branches for not providing adequate oversight and resources to allow agencies to enforce good, comprehensive laws that were in place for years - poor management, ethics, and oversight of key executive and managerial, origination, and sales staff - all areas of mortgage production and secondary market sales for lenders and Wall Street players and rating agencies. - consumers who either blatantly lied about their information or took no responsibility for their ignorance and management of their own financial affairs.

If only one of these sectors did NOT contribute in a major way to the events that unfolded, the scale of the crisis in my opinion would have been far, far less than it was.

To continue to call for a complete overhaul of the system without recognizing the dynamic of what happened from each sector carries with it the risk of destroying what HAS worked well before the "perfect storm" of events combined. It is the wrong way to proceed.

Posted by T Pinkowish | Wednesday, January 30 2013 at 9:48AM ET
Add Your Comments:

Already a subscriber? Log in here
Please note you must now log in with your email address and password.