The Paulson Plan — Can It Work?
April 7th, 2008
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On Monday, March 31, Treasury Secretary Henry Paulson announced his proposal for streamlining the regulation of lending institutions and mortgage brokerages by creating a mortgage origination commission (MOC) that would essentially combine five regulatory agencies into one.
The plan is already being described the broadest restructuring of federal regulatory institutions in 75 years, with a call to merge agencies and redraw lines of authority that in some cases go back to the Great Depression. The goal, according to Paulson, is to create a unified oversight commission within the Federal Reserve that is flexible enough and sufficiently equipped to respond to the rapid changes in the real estate lending market.
According to the Los Angeles Times, Paulson described Washington’s current regulatory apparatus as utterly outmoded and outflanked by market innovations such as sub-prime mortgages and mortgage-backed securities. According to Paulson, financial innovation was racing ahead at such a feverish pace, the best the federal government could hope to do was define the broad outlines of a system that could be altered as new financial products, opportunities and threats emerged.
Will Paulson’s administrative overhaul prevent a “Subprime Meltdown II”? In the short term, the answer is unequivocally “no.” Obviously, Paulson’s plan must first be detailed out and agreed upon by Congress, which will take time. Then, assuming the proposal takes effect, it is uncertain exactly how much control and regulation the Fed will impose on banks and brokers.
In the long term, it is uncertain whether the planned restructuring will prevent another mortgage meltdown in this country. Many critics believe the plan is too light on investment banks, mortgage brokers, and Wall Street, citing the plan’s lack of substantive regulatory restrictions. They believe it will not implement tight enough regulations to make a difference.
The proposal would create a framework for regulating brokers and lenders more closely, including the creation of a mortgage origination commission comprised of federal bank regulators and state officials who would develop licensing requirements for mortgage brokers and a method for revoking those licenses in cases of bad behavior. However, as the critics point out, the plan offers no specific substantive guidelines. For the most part, it is only procedural in nature. In sum, the proposed plan’s regulations and penalties are about as clear as mud.
Historically speaking, lending markets and products always out-maneuver and outgrow the administrative regulations and bodies that govern them. Even if the proposal is adopted and even if it catalyzes meaningful regulations with strict penalties, lenders and mortgage brokers will find a way to develop new lending methods and products that escape the reach of almost any regulations the Fed may impose.
There will always be some lag time between the creation of new loan products (i.e., threats) and a corresponding regulatory response from the Fed. Even after any proposed restructuring takes effect, borrowers will need to continue to protect themselves by working with trustworthy mortgage professionals and seeking outside advice and review from experienced third parties.
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April 20th, 2008 at 6:24 am
It’s about time…
Great Job Mr. Paulson