Obama Plan Comes with Fees

The last thing in the world mortgage bankers want right now is to pay millions of dollars in assessments to fund a new regulatory agency that will tell them to watch their "P's and Q's" when it comes to originating loans. Then again, it can be argued that if lenders - and their investment bankers on Wall Street - had been carefully underwriting nontraditional loans during the boom of 2003 to 2007 the proposed Consumer Financial Protection Agency wouldn't be on the birthing table.

But it is. So, what to make of the CFPA, an idea unleashed by the White House last week? First off, let's state the obvious to readers who don't know how things work inside the Beltway: the president proposes a massive restructuring of something (in this case the financial regulatory structure of our nation's lenders) and then lobbyists start working their contacts on Capitol Hill and in the administration to defeat the parts they don't like (which is most of it). Keep in mind that regulatory agencies - the Federal Reserve, Federal Deposit Insurance Corp., among others - have lobbyists, too, and there are certain items in the Obama plan they may not like. In the end, a fraction of what the president proposes actually becomes reality. It's even possible that nothing will get passed.

Among the White House's many ambitions in regard to mortgages is to form the CFPA so it can enforce a plethora of mortgage-related laws including the Real Estate Settlement Procedures Act (key mandate: loan disclosures to consumers), Home Ownership and Equity Protection Act (overcharging of interest rates and points), Home Mortgage Disclosure Act (data collection/information on approvals) and even certain aspects of the Community Reinvestment Act (lending to consumers and businesses located in your backyard).

It sounds like the agencies that currently enforce these mortgage rules and laws - the Fed, FDIC, HUD - aren't doing such a good job. In its overhaul document the White House notes that the Federal Trade Commission has a "clear mission" to protect consumers but "lacks jurisdiction over the banking sector." That's an interesting conclusion because as I recall back in 2001 the FTC sued Citigroup for $500 million, charging the mega-bank with predatory lending. (A year or so earlier Citi had stupidly paid top dollar for a once-high-flying subprime lender called Associates First Capital and had to pay for that firm's sins.)

In the end, Citi coughed up millions and promised to mend the ways of its evil subprime affiliates. Of course - and despite the settlement - the investment banking arm of Citigroup became one of the largest securitizers of subprime loans and wound up holding onto billions of dollars in ABS when it couldn't find buyers for all the junk it was creating.

But Citi's mishap in subprime securitization wasn't necessarily the fault of the FDIC and the Fed. The Bush-era Securities and Exchange Commission was asleep at the wheel when it came to bond disclosures.

As MBS inventor Lewis Ranieri pointed out in late 2006 to a room full of Washington regulators: it's not what was in ABS SEC documents, it's what wasn't in them: details on loan underwriting exceptions. Lots of missing details. The rating agencies were asleep, too. Take away subprime securitization and you eliminate the main source of liquidity - you cut off the head of the monster.

Keep in mind that in years past both the FTC and several state attorney generals have successfully sued some of the largest subprime lenders in the industry, including Household Finance and Ameriquest. The Obama administration notes in its plan that it is not proposing CFPA "because we seek more regulation but because we seek better regulation." OK, sure.

I keep hearing politicians and regulators pronounce that they need to change the system "so this never happens again." The problem is "this happened" because regulators in Washington (namely the SEC) didn't do its job in regard to both subprime ABS disclosures and regulating credit default swaps. Consumer protection mortgage laws were on the books and in some cases they were actually enforced.

It seems to me the Obama plan is all about reorganizing the regulatory living room. The furniture stays the same - it's just in a different place. What's the point, really? The tone gets set at the top. That would be the White House. Yes, I'm blaming the Bush administration.

The mandate should be to enforce existing laws and rules that everyone always knows about. As a regulator the idea should be to protect the public from rogue financial operators while not worrying about getting a phone call from an elected official who wants to know why you're destroying the ability of his constituent to make a ton of money.

Moral of story: just because a company appears to be making money and creating jobs that doesn't necessarily mean that company is doing it honestly.

Paul Muolo can be e-mailed at Paul.Muolo@SourceMedia.com.