The government, consumers and the industry should demand from the new Consumer Financial Protection Bureau a sharp immediate focus on the regulation of mortgages — right now and until new rules are in place and effective.
The first reason for this is obvious. It is mortgages that nearly brought the financial system to meltdown. Mortgages have so far caused over $100 billion of damage to consumers who will pay taxes to cover losses in the two government-sponsored mortgage entities. How about trying to protect us from a repetition? Isn't that the first priority?
According to Elizabeth Warren, who is organizing the CFPB, it was mortgage "trickery" that saddled a great many consumers with loans they could not afford, caused the collapse of the housing market and led to loss of their homes. Nothing remotely comparable to this amount of damage has been caused within living memory by any other category of consumer loan product.
Furthermore, the CFPB has a legislative mandate to fix mortgage disclosures. It has no comparably specific mandate for other financial products. Why not do what is required, obviously important and surely very difficult before trying to reduce other consumer loans to "apples-to-apples comparisons," as Warren now seeks to do.
Compare the product comparisons as they now exist. An installment loan, auto or credit card agreement might be five pages long. The consumer generally has ample time to study the detailed terms before committing himself financially, should he wish to do so.
But the documents that a borrower has to sign to get a mortgage could total 50 pages or more. Many signatures are required. By the time you get to sign all these documents, you have most likely spent $1,000 or more for appraisal and other services. Now you are approaching closing, and confronted with these endless pages. Are you actually going to read them all? If you don't like them, what are you going to do about it? Start all over again with another bank?
No one I know of except Warren herself has argued that other categories of consumer lending need to be reduced to standard products — any more than checking accounts need to be standardized. But the absolute necessity to standardize many aspects of mortgage lending is brought home by the securitization and servicing fiascoes. Reliable comparisons of servicing policies and performance are possible only if there are far fewer types of apples. Servicer guidelines and servicer and securities ratings failed abjectly in part because they could not comprehend the endless variations in mortgage terms.
We are told that Congress and the executive branch have shied away from dealing with mortgage market issues.
Isn't Elizabeth Warren required to wade into this cauldron? If she doesn't, who will?
According to the latest estimate I've seen, the CFPB now has 50 employees, which Warren aspires to grow to some huge figure such as 5,000 — before the House can devise a way to crimp the appropriations. But, current and immediately foreseeable resources can't possibly suffice to deal in an urgent, timely way with mortgages plus anything else, such as unsecured lending or deposit accounts.
Some would say that the uniquely American mortgage-induced disaster was directly associated with a peculiar, possibly unique feature of U.S. home loan markets: the immense collective role of mortgage brokers, many of them too small to be effectively regulated. The brokers accounted for up to 50% of some types of production. In other countries, which suffered less damage, they typically have as little as 10% of the market.
Only the CFPB can provide federal regulation of mortgage brokers. Even with draconian regulation, however, they are inherently less invested and more mobile than the other market participants such as banks. Furthermore, the lender has to be required to know his customer. Whether that is possible in the context of broker intermediation is a challenge that the CFPB must address head on.
Almost anyone who has bought a home will agree that the need for mortgage brokers is principally a result of the nonuniformity both of mortgage terms and of underwriting requirements — rendering nearly impossible the apples-to-apples comparisons of mortgages that Warren has sought for consumer financial products. The CFPB can and perhaps should squeeze or eliminate residential mortgage brokerage as we have known it up to now.
Detailed regulation of mortgage structures and terms, not just disclosures, has a considerable history. States provide such regulation for nonbank lenders. California state-chartered savings and loan associations in the past were allowed to make mortgage loans only within rigid templates of loan-to-value, required payments and underwriting documentation. Substantive regulation will be neither a cure-all nor a universal preventative, but it is needed now. The CFPB should provide it.
