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Investors Urge For Better Practices, Repeal of ‘Senseless’ Rule

One consequence of the prolonged financial crisis is the amelioration of its business structures and processing through new legislation and lessons learned on the ground. And investors are at the forefront of efforts trying to ensure that potential outcome becomes a reality.

For example, controversy surrounding the Volcker Rule of Dodd-Frank that bans so-called proprietary trading by banks worry investors who claim it is “already showing signs of lasting economic damage and will add—not lessen—systemic risk.”

In a recent statement voicing member concerns, director of the Center for Investor and Entrepreneurs, John Berlau, noted that the Volcker Rule of Dodd-Frank—whose implementation is under the auspices of the Financial Stability Oversight Council—must be repealed.

“Initial reports indicate that the council may try to assuage some concerns about the rule’s economic effects by attempting to draw a line between long-term investing from short-term trading,” Berlau wrote in the statement.

The Center for Investor and Entrepreneurs suggests Congress should repeal this senseless rule because it has the potential to cause lasting damage to the economy and the mortgage market by increasing investment risk.

The Center for Investor and Entrepreneursfurther notes, “The Volcker rule is based on the faulty premise that a financial institution making a loan—any loan, including mortgage loans—is somehow inherently more dangerous than investing or trading.”

The center argues that that it was exactly that premise that led to the enactment of Glass-Steagall Act during the Great Depression, which separated “commercial” banking from investment banking.
Mortgage investors also are actively participating in the best investing practices debate and the improvement of the existing mortgage servicing model.

The Association of Mortgage Investors, whose member firms are asset managers and fiduciaries for state, county and local pension funds and retirement systems, describes its goals in line with national efforts to find “effective alternatives to foreclosure and protecting the retirement funds of state citizens and the public money at stake.”

A recent AMI white paper entitled, “The Future of the Housing Market for Consumers After the Crisis,” outlines recommendations how to relieve distressed consumers and bring back a viable housing market.

The organization’s executive director Chris Katopis stated that AMI is focused on developing realistic solutions that “sort out the housing finance market and broken servicing model in an equitable fashion” for all parties, such as responsible borrowers, distressed homeowners, mortgage servicers and the mortgage investors, who include state, county and local pension systems, “each having an enormous stake in the settlement.”

Among indications that mortgage servicers and the overall U.S. housing market still have many unresolved problems is the ongoing 50-state investigation into foreclosure practices.

Although a resolution of the foreclosure crisis is in the best interests of our nation’s economy, banks, homeowners, taxpayers and fixed-income portfolio investors who rely on monthly cash flows from mortgage-backed securities, AMI said, the resolution has to be timely and even more importantly it must be “well constructed” so the appropriate parties are held responsible.

As the attorneys general conclude their state investigations and design a multistate settlement in the next few months, Katopis said, hope of mortgage investors is that future settlements “carefully consider the impact on the performance of state pension, retirement systems, life insurance and the like to responsibility is where it is due and all parties “bear the expense of past bad acts.”

Mortgage investors conclude that “the only way to truly put distressed borrowers on a sustainable path forward is by including the borrower’s entire debt load in the modification or workout program.”

AMI’s recommendations on ways the states can help consumers and servicers alike are summarized as a combination of better execution, transparency, the development of sustainable programs such as modifications and principal reduction options.

Mortgage investors say that since the above are “a starting point for long-term, effective, sustainable solutions,” anything less just prolongs the recovery of the housing market.