Lax Regulation: It’s not just for Republicans

Contrary to their protestations, the Democratic Party lacks the will and discipline to be a consistent financial regulator.

Here’s the Wall Street Journal in 2011 on what down payment should be necessary for a mortgage to be considered a “qualified residential mortgage”:

The Dodd-Frank financial overhaul law enacted last year enabled regulators to define a so-called gold-standard residential mortgage that would be exempt from costly new rules.

At least three agencies—the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency—back a proposal to require home buyers to put down at least 20% of the sales price in order to obtain one of these “qualified residential mortgages.” One proposal would also require borrowers to maintain a 75% loan-to-value ratio for refinances, and a 70% loan-to-value for cash-out refinances in which the borrower refinances into a larger loan, according to people familiar with the matter.

That’s three independent regulatory agencies saying the same thing. Not everyone agreed with them though:

The mortgage exemption as written is opposed by a broad coalition of affordable-housing advocates, consumer watchdogs, real estate agents, banks and home builders. The groups say the plan would unfairly restrict credit and put homeownership out of reach for responsible borrowers. They want regulators to shrink the size of the down payment.

Do you want to take a guess at who eventually wins this fight?

Before we adjudicate that dispute, let’s excerpt from page 43 of the Levin-Coburn report that deconstructed the causes of the financial crisis [big government pdf]:

Many of the loans guaranteed by the FHA and VA, some of which required down payments as low as 3%, were bundled and sold as mortgage backed securities guaranteed by the Government National Mortgage Association (Ginnie Mae), a government corporation. Ginnie Mae guaranteed investors the timely payment of principal and interest on mortgage backed securities backed by federally insured or guaranteed loans.

I invite you to search through the Levin-Coburn report on the words “down payment”. You will find that though the creditworthiness of the borrower matters a great deal and that some people just plain lied on their loan applications. Nevertheless, down payments matter, and they matter in a way that 0-3% is bad and 20% is good. The real-estate-agent lobby might not like this, but Loan-To-Value ratios largely dictate the health of a mortgage.

Now in 2014, the Wall Street Journal gives us an update.

On Monday, Federal Housing Finance Agency Director Mel Watt announced that mortgage-finance companies Fannie Mae and Freddie Mac would start backing loans with down payments as low as 3%. And on Tuesday, three federal agencies approved a loosened set of mortgage-lending rules, removing a requirement for a 20% down payment for a class of high-quality loan known as a “qualified residential mortgage.”

Matthew Yglesias explains how this is a short-term and short-sighted attempt by the Obama Administration to inject a bit of short-term stimulus before the midterms. But it’s not only that. It’s a demonstration that the will to regulate is lacking. It’s presumably the Republicans who want to deregulate everything, but this is a unilateral choice on the part of the Obama Administration.

When this administration talks about regulation, it means regulating things it finds already finds unpalatable, like the securitization of mortgages. That’s a fat-cat product.

3%-down loans, however, are a regular-people product. And it’s one that a lot of people who can’t save up before buying a house probably like. That’s the voting base. It’s regulatory capture by an a politically important subset of the general public rather than by Goldman Sachs. But that just makes the headline less suitable for the Huffington Post. It’s still capture.

A regulator who only regulates when it doesn’t cost anything and it is politically easy isn’t much of a regulator.

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