Firms may have to put "warning labels" on their alternative products or require applicants to fill out financial-experience questionnaires, according to the administration.
"This is a game changer," said Ed Mierzwinski of U.S. Public Interest Research Group,
Warning labels? Has anyone seen a mortgage in the past 5 years? There are tens of pages, and you have to initial it in 17 places, so many none are read by your average borrower. So now we will have to initial in 34 places. If the warning light is always flashing, people ignore it. But to prioritize implies understanding the relative magnitudes of risk, and that is outside their scope. This doesn't change anything.
Getting rid of the OTS, and moving them into the Fed? Yawn. Everyone gets new business cards. The new Consumer Financial Protection Agency can now "enforce rules across a slew of financial products", and chances are these will involve a lot of busy work, mercilessly slamming anyone trying to sell a derivative that no longer has a market. They will probably also prevent financial institutions from diversifying their product base, making friend with industry lobbyists eager to prevent competition, all in the name of preventing another systemic collapse. But they will also now micromanage Community Reinvestment Act requirements, which surely had absolutely nothing to do with this crisis.
But what about the prime mover in all this, mortgage underwriting. You know, the loans without which derivatives and banks would not have collapsed? The FHA actually encouraged a program that allowed home buyers to pay up to 6% of the down payment, which is nice because that means no money down in many cases! The positive feedback loop of nonprofits getting Federal grants, giving money to poor people to buy homes they could not afford, supported by homebuilders and lenders who would then donate to legislators, could not be more corrupt. Last year, they quietly shuttered that one, but the FHA still proudly notes "The most popular FHA home loan is the 203(b). This fixed-rate loan often works well for first time home buyers because it allows individuals to finance up to 97 percent of their home loan". And the CRA lending targets that could only be acheived via lowering lending standards? The Consumer Finance Protection Agency supposedly will only double down: "A critical part of the CFPA’s mission should be to promote access to financial services, especially for households and communities that traditionally have had limited access." With the government on the hook, this merely means higher taxes, though, not systemic financial panic. That's a relief.
Regulator shopping, agency rating shopping, are all a sideshow. Sure they are bad, but it didn't matter because no regulators or investors thought those mortgage innovations had any risk. It wasn't like evil guys in suits were manipulating the system, the system was lending too much because it was thought to be profitable, safe, and morally good. It's like blaming binge drinking on beer commercials. Sure some knew it was a train wreck, but they were lonely voices, and giving Washington more power would have done zero back in 2006 because there was no large support for rolling back the insane mortgage underwriting standards that were implicitly predicated on home prices not falling.
Regulators are making sure the market won't make the same mistakes again. Perhaps the UN should inform Germany not to start any more two-front wars in Europe this century (didn't work out so well in the 20th)?
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