After the traumatic disintegration of the American financial system in 2008 just as the nation was settling into a recession, the dire need for more stringent financial regulation became patently obvious. Last month, the Securities and Exchange Commission (SEC) proposed additional risk-retention requirements and disclosure rules be imposed on Wall Street firms who package and sell asset-backed securities (read: mortgage pools).
Congress has similarly been pushing for legislation to bring about financial reform, an uphill battle which is incrementally building momentum as the population learns more about Wall Street mismanagement.
This May, federal banking regulators have joined the fray, proposing that lenders who create and sell asset-backed securities retain a minimum of 5% of the securities on their own books, a requirement of the Federal Deposit and Insurance Corporation (FDIC). If this 5% FDIC requirement is satisfied, the government cannot seize the security in the event the lender which created it fails. By keeping some skin in the game, it is hoped that lenders will be motivated to loan only to qualified borrowers.
Lenders are ironically nonplussed by this proposal, claiming that requiring them to keep 5% of all the loans they make on their balance sheets would dramatically hinder their ability to lend, thus making financing more difficult to obtain for borrowers and hurting the already fragile real estate recovery. Lenders want the profitable job of lending to the nation’s people, but they want none of the financial responsibility for any bad results.
first tuesday take: Lenders are notoriously short-sighted, as well as weak of memory. It is in their nature to think only of the profit-making potential of the immediate future, not the long-term ramifications of their actions (or the actions taken by regulators intent on keeping them from doing social harm).
True, more stringent regulations will prevent some borrowers from obtaining financing. However, borrowers unable to obtain financing will be refused for a good reason – they aren’t qualified and aren’t entitled to an allocation of our national wealth.
It was a scant few years ago when loose lending practices and the proliferation of subprime lending caused the economy to implode. If a new generation of unqualified borrowers are given loans they have no ability to repay in an effort to support home sale volume and prices, we’re planting the seeds for yet another property market collapse within a decade – not a very intelligent practice for any of us in the business for the long-term.
All the re-regulation proposed by Congress, the SEC and now the banking regulators at the FDIC will serve one ultimate purpose: to instill stability in the real estate market and set the stage for future prudent and sustainable mortgage lending practices.
So ask yourself this: is it better to let unqualified borrowers back into the market (and out of apartments) for the sake of the immediate (and temporary) real estate sales activity it will bring, or better to avoid the heinous mistakes of yesteryear which, if left unchecked, will tarnish the Golden State yet again?
If you’re still undecided, just think back two years to the bleak winter of early 2008, the most fractured economic period since the Great Depression.
Re: “FDIC proposes new rules on asset-backed securities,” from the San Francisco Chronicle