A new Standard & Poor's report suggests a “proactive policy orientation” that “would focus on the financial system's overarching purposes” would be helpful in meeting regulatory aims when it comes to mortgages, among other things.
In one section of the report by senior research fellow Mark Adelson and deputy chief economist Beth Ann Bovino, three scenarios that include specific plans for mortgages are considered.
• Aiming to provide “basic financial services,” which would result in a situation in which “consumer loan products, including residential mortgage loans, would be simple.”
Under this scenario, “There would be few, if any, adjustable-rate mortgage loans. There would be little, if any, federal preemption of state consumer protection laws such as usury laws and anti-predatory lending laws.”
However, “To capture services offered by different types of firms (e.g., banks versus mortgage banks), regulation might focus on activities (i.e., mortgage lending) as opposed to the type of entity that conducts them.”
• Aiming to “harness capitalism to maximize output,” which might result in a regulatory regime that embraces “a somewhat wider variety of residential mortgage loans beyond the traditional, 30-year, fixed-rate, fully amortizing loan” as well as securitization.
• Aiming to provide “financial services as an export industry,” which could result in a situation where, “The widest array of residential-mortgage-loan products would be offered, including subprime loans, pay-option adjustable-rate mortgages, interest-only loans, and no- and low-documentation loans, in addition to traditional 30-year fixed-rate mortgages.
“The financial system might resemble that of the U.S. during the period from the late-1990s to the onset of the financial crisis. There would be a high degree of interconnectedness between institutions and firebreaks would not exist. Systemic risk would be significant and financial crises would be more frequent and more severe when they occurred. Regulators would readily acknowledge that some institutions are ‘too big to fail.'"
