My friend Jeff Appel, as smart a mortgage banker as you are likely to meet, has been talking a lot lately about Dodd Frank and how it is remaking the mortgage business. This legislation, intended to save us from future financial meltdowns, is likely in the meantime to cause a meltdown of its own. In addition to imposing onerous regulation which render mortgage brokerage increasingly challenging, it also creates such severe consequences for failure to adhere to its literally thousands of points that even the most sanguine of mortgage originators are now trimming their sails (and sales!)
Why is it that, as the pendulum swings between extremes of behavior, the legislative cure is often worse than the disease? First the free-for-all: the Glass Steagall Act is repealed, taking down the Chinese wall between commercial banks and investment banks, the SEC takes a LONG nap, and in the meantime the Gordon Gekko ethic seemingly sweeps every corner of the finance, lending, rating, and real estate development industries. Then everything goes kaflooey because greed perhaps wasn’t so good after all. So now, instead of actually attempting to enforce the laws which are already on the books, Congress creates a whole set of new ones, no doubt vastly more complex than most of them even grasp, to save us from ourselves.
Don’t get me wrong: it seems pretty clear that we needed some saving. Our unfettered getting and spending DID lay waste our powers (with apologies to Wordsworth.) But now we have erected substantial barriers to the very recovery we are longing for. How is the national housing market to bounce back when getting a loan is so very difficult, and the secondary mortgage market so constrained in the loans it can buy? How are small businesses, the oft vaunted engine of our past recoveries, to expand and hire if their two main sources of cash – small business loans and home equity loans – are unavailable to them? An article in this week’s New York Times described the plight of one small entrepreneur after another whose ideas and companies are starving due to the unavailability of cash. Dodd Frank, well intentioned though it may be, is choking the feed tube for recovery.
I wait in vain for honest political discourse on this topic and a host of others. Why did the legislators who approved TARP pretend that money was going to be lent out when they knew banks were going to use it to stabilize their own balance sheets? Banking and commerce may have been unpopular in the wake of the financial meltdown, but they are necessary if the country is to function. But instead legislators got on the populist treadmill and were shocked, shocked, to discover that these funds hadn’t gone to ease the pain of the 99% (with apologies to “Casablanca.”) So we get hugely complex and probably unenforceable legislation to hyper-regulate what we allowed to go almost completely unregulated during the years when It looked like the “new economy” would make everyone a real estate millionaire.
The crisis in the global economy is deep and complex and there is no quick fix, legislative or otherwise. Unfunded government and pension liabilities alone could sink many of the economies of Western countries, not to mention some of our states. Entrepreneurship, and a rebound in housing, still have the potential to ameliorate if not cure these ills. So for God’s sake let’s get out of their way!