Money Morning Mailbag: Are We Headed for Over-Regulation?

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As U.S. financial reform continues to be the focus of controversy and debate throughout the nation, it seems as if the same questions arise again and again: How much regulation is necessary to create a fair market? What can we learn from our previous banking policies? What does the future hold for lenders, borrowers and banks?

The concerns aren't only domestic in nature, either. Readers want to know whether Greece's problems be attributed to under-regulation, and wonder if there aren't too many exceptions made for countries and banks that get into trouble?

Here's a sampling of the questions and comments that have poured into the Money Morning Mailbag from readers in the past week. They covered such topics as how much regulation countries need, and raise the issue of how banks, mortgage brokers, borrowers and investors are and could be affected.

Cutting Off the Mortgage Industry's Life Line

MM: Money Morning Contributing Editor Martin Hutchinson in early January 2010 criticized U.S. Federal Reserve Chairman Ben Bernanke's theory that the home mortgage bubble was a regulation problem. Mr. Hutchinson wrote that if given too much power, regulators' self-serving objectives would inhibit implementing effective regulations. There always needs to be choice in the market - something that could disappear with over-regulation. 

The topic continues to receive a lot of reader attention, including the following inside-the-industry perspective that outlines how over-regulation could kill an industry upon which many consumers depend.  

Comment [addressed to Mr. Hutchinson]:  I thought your article regarding Bernanke was excellent.  I have been a mortgage broker for 28 years now.  This may be my last, as the over-regulation of my industry has gotten way out of hand.  Have you had an opportunity to see the new good faith estimate?  It's now four pages long.  While I agree that option ARMS were not for everyone (I only originated two of them, both for investors who understood the product), the banks and Wall Street were sure pushing them.  What I am concerned with now, however, is that there is just no common sense anymore. 

Some of our wealthiest individuals cannot get loans.  People with 800 FICO scores who are self-employed and write off a good deal of their income and who have 30%-40% to put down cannot get a loan these days.  These are the very people who help create jobs in our economy. 

The appraisal situation is absolutely ridiculous.  Unless one lives in a metropolitan area, it just doesn't work.  I live in a semi-rural neighborhood just to the south of Tucson.  Sales have been few and far between.  Appraisers are being asked to value homes in our area when they live 200 miles or more away and do not know or understand our marketplace.  This has a devastating effect on values.  I'm sure that this is happening across the country. 

Further, the government is now proposing to limit a loan officer's income to a percentage of the loan amount.  If a loan officer can only make 2% on a loan, no one will want to do any loans under $150,000.  I generally charge between 1.5% and 2% now, but if I am working on a $90,000 [loan] that is not enough to cover processing costs, office overhead, etc. Also, if someone wants a "no-cost" loan now, I need to make 3%-4% so that I can pay for all their closing costs.  I guess these will go away too.

The government has created a lending system that - in the understatement of the year - completely favors big banks, does not lend money to the people who fuel our economy, is further devastating home values across the country, and that will ultimately cause many of the seasoned, knowledgeable pros such as myself to seek other means to earn a living.  I am in this for a profit - a fair profit, but a profit.  I was also in this because it was interesting, challenging and gave me a degree of freedom.  I don't want to work for the federal government, and I'm sure I have many professional colleagues who share this sentiment.

Thanks for the great article!

- Beth W.

From the Other Side...

MM: Hopeful borrowers are feeling strapped from over-regulation and fear there's no solution:

Comment: My biggest concern is about banks giving out loans. I have a job making $100,000 plus in salary but it's on a consulting basis because banks are not hiring [full-time] right now to keep their headcounts low: banks such as Bank of America Corp. [NYSE: BAC], Wells Fargo & Co. [NYSE: WFC], Credit Suisse Group [NYSE: CS], Citigroup Inc. [NYSE: C]. I can't get a loan since I need two years of 1099! I am willing to have a co-borrower to guarantee the loan, yet I still can't get a loan where the payments will be less than my rent right now! How does this make sense and how can first time homebuyers buy a house?

-- Haril P.

Learn From the Past to Earn in the Future

MM: Last week, Shah Gilani answered a reader request to share his thoughts on Robert Kuttner's 2007 testimony to the U.S. Committee on Financial Services. Mr. Gilani said the testimony - which you can access by clicking here - gave us a clear look at the past and shone light on the profit opportunities available during the current easy-money policy. These capital waves are giving us chances to learn and earn from repeated mistakes.

Mr. Gilani urged all subscribers to examine Mr. Kuttner's testimony; another reader offered his take on the insightful words:

Comment:  Robert Kuttner's October 2007 testimony before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C. is stunning in its clarity. In it he states:

"I just read Chairman Greenspan's fascinating memoir ... his memoir ... confirms Mr. Greenspan's strong support for free markets and his deep antipathy to regulation. But I don't see how you can have it both ways. If you are a complete believer in the proposition that free markets are self-regulating and self- correcting, then you logically should let markets live with the consequences. On the other hand, if you are going to rescue markets from their excesses, on the very reasonable ground that a crash threatens the entire system, then you have an obligation to act pre emptively, prophylactically, to head off highly risky speculative behavior. Otherwise, the Fed just invites moral hazards and more rounds of wildly irresponsible actions."

Of course, politicians are not elected or regulators appointed to inflict pain on the populace. We are all to blame. The lesson here is to have adequate warning systems and to 'act preemptively' to prevent such calamities. At the very least in the future the Fed and SEC should be required to address annually before Congress speculative activity and risks and available countervailing measures and actions.

-- Bernard

Rules? What Rules?

MM: Perhaps, in a case of too little regulation, Greece continues to dig its way out of a debt-hole and is under the watchful eye of its European Union (EU) counterparts. Other countries' reluctance to jump too quickly to Greece's aid stems from a desire to let that government solve a problem it got itself into. Failing to rein in spending and neglecting to tighten tax regulation are two factors contributing to Greece's current fiscal travails.

Comment:  Instead of helping those helpless Greeks, why don't the banks and the EU force the Greek government to get out of bed and go to work collecting the outstanding taxes that its businesses and citizens have failed to pay during the period leading up to this alarm.  Their record of collecting only 24% of the taxes due is dismal even by tin-pot dictator standards.  And to think that ancient Greece was the birthplace of democracy...

-- (Submitted Without Name)

Comment:  It's all a matter of pride for the EU because to rescue Greece means they have to swallow their own pride and break their own self-made "no bail-out" rules (not to mention setting a very dangerous precedent for other EU countries in trouble in the future). It's like being caught in a "damned if I do and damned if I don't" situation.

Lesson from all this? Simple: Stick to the rules! Don't be like America...(which as far as I'm concerned is "technically a bankrupt nation" whether it likes it or not)... but they do have this thing called "Chapter 11"... wonder whether the U.S government can use that to protect itself? (just thinking aloud) ehehehehehhe!!!! Or EU/euro is going to end-up in a much worse mess that would make the U.S. bailouts look like a walk in the park.

But of course we must remember that in the U.S., [our leaders] are actually spending those billions and trillions bailing out their own cronies! And yet they dare to talk about third world corruption!

-- Posted on Money Morning Web site 3/25/10 by "Sir Camelot"

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