Treasury Point of View is Persuasive, Not Factual 

(Appeared first on "MORTECH Musings" Blog)

May 2, 2011

On April 19, 2011, Deputy Secretary Neal S. Wolin answered critics of the Dodd-Frank Act. Wolin set up his remarks by characterizing Dodd-Frank as a well-reasoned antidote to the effects of “a financial panic of a scale and severity not seen in decades.  The crisis was brought about by fundamental failures in our financial system.” He draws the very general conclusion that “There was no alternative to reform.” Reform? Or, Dodd-Frank specifically? The distinction between a general need for reform and a particular complex of new rules is not made clear in his speech.

Wollin seemed to say that what we have is Dodd-Frank and he calls for popular support to neutralize critics of the legislation. Wolin wants to rally the public by making the consequences of the 2008 financial crisis personal to Americans. “Not only our economy, but also the lives and livelihoods of tens of millions of American families were devastated by the (financial) crisis,” he states.

Wolin makes this speech an occasion to rebut very specific and selective criticisms made of Dodd-Frank. (It is not obvious who are the complainants).

Wolin takes on the following criticisms:

1. Some say that there’s a lack of coordination by the regulators.

2. Some argue that transparency in the derivatives markets will harm liquidity, or that margin requirements will unnecessarily tie up capital.

3. Some complain that our reforms will unfairly disadvantage U.S. firms as they compete globally.

4. Some say the new consumer agency will stifle consumer choice and innovation, that it will interfere with existing regulators, or that it’s not accountable to anyone.

5. And some even say we can’t afford to pay for reform.

 I will deal briefly with two aspects of Wolin’s comments. First I will address the idea that the strictures of reform will make US financial institutions less competitive. Then I will critique the cost of forming the Consumer Financial Protection Bureau (CFPB), a creation of Dodd-Frank.

Competitive Stance

Much of what passes as legislation or policy is abstract. Input to the reform generally comes from academic financial models or from hearings held by legislators or their staff.

Neither politicians nor regulators systematically collect the views of the ultimate interpreters of financial reformation (the FI’s). Those that appear at hearings usually are “self-selected.” If they are representative of the industry, they are so by accident. If regulators want public input, there is more scientific way to get what is useful.

The chart above is taken from MORTECH 2010, a stratified random sample of mortgage lenders. MORTECH 2010 reveals that lenders are supportive of reform in general. The survey shows,however, that lenders are skeptical of the potential results of reform. Wolin and his colleagues really should address the added expense of complying to reform, the operational complexity caused by sets of new rules, and lenders reduced ability to qualify deserving, but idiosyncratic loan applicants.

The FI’s are run by practical managers. These manager seek a fair return to a rational approach to running a business. They are constituents of reform and should be consulted. Indeed, they are neither subjects of government nor should be criminalized en masse.

Consumer Financial Protection Bureau (CFPB)

The Bureau of Consumer Financial Protection was created in July 2010 as part of the Dodd-Frank financial reform legislation. The arguments to establish a new bureaucracy never seemed cogent to me. In this posting, I won’t visit all of the issues. I merely want to comment on the cost of pursuing elusive benefits expected from the CFPB.

The CFPB is a regulatory body. It is not an organization that can facilitate the identification of worthy borrowers, shepherd intelligent underwriting, or distribute borrowed funds more efficiently.

CFPB has as a major objective the unification of seven federal agencies under the Consumer Financial Protection Bureau. The novel undertaking of the CFPB is to focus on consumer protections. None of the seven agencies had consumer protection as its singular objective. How much are the protections worth to taxpayers?

When speaking of the operating budget of the CFPB, Elizabeth Warren, Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau, refers to The President’s Budget for Fiscal Year 2012. The Federal Budget estimates CFPB operating funds of $142.8 million for FY2011 and $329 million for FY2012.

A $500 million investment over two years in a start-up with an uncertain return simply is, as they say, “mind-blowing!”  A much more rational approach is to prototype the workings of the CFPB. Experimental programs would provide a bench mark against which Washington (the Federal Reserve Board in the case of the CFPB) can make future budget decisions.

The CFPB, after all, is a regulatory agency. Their mission is not to make markets for loans more efficient nor to maximize the welfare of US households. The profit accruing to a government organization like the CFPB is nearly impossible to estimate. This is all the more reason to invest carefully and do so with progressively more evidence as to the effectiveness of the CFPB. There is no support for creating a massive agency all at one time at such a great cost. No practical banker would make such an investment.

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Mobile Technology as Industry Conduit

Murray, Michael
FORT LAUDERDALE, FLA.--Mobile technology for the mortgage industry can bring internal value and customer value, depending on its fit within an organization, said industry analysts here at the Mortgage Bankers Association’s National Technology in Mortgage Banking Conference & Expo.

Jeff Lebowitz, president of MORTECH LLC, Bend, Ore., said wireless technology applications have increased dramatically within the real estate finance industry. He said smart phones will fully intersect with standard technology by the third quarter of this year.

However, Lebowitz cautioned that any strategy to “leapfrog” competition on mobile technology could backfire. He said an inflection or tipping point for mobile technology to become viable was four or five years ago and, if mortgage companies did not make investments in mobile technology, they now need to play catch-up.