Please Sign on the Dotted Line

Now that the USA has decided that it is time to get tough and tighten up the guidelines for mortgage documentation it is interesting to see that a lot of the new regulations appear to simply be to re-enact the rules and regulations which were created in the 1930's.

As a result of that financial crisis broad reforms such as deposit insurance, prudent limits on risk-taking and transparency combined with the Federal Reserves role as lender of last resort, and for a fee, access to the FDIC were established.

The problem we are being told was that since then we experienced the growth of non-bank financial institutions which were established to operate outside of the regulatory framework which applied to traditional banks. This parallel banking system sought an environment of lighter regulation, lower capital requirements, weaker consumer protections and better tax and accounting treatment.

This begs the question of course as to why these new institutions were allowed to mushroom. It's not as if the creation of off-balance sheet entities such as bank-conduits, Asset-Backed Commercial Paper Conduits (ABCP) and Structured Investment Vehicles (SIV's) and specialised finance companies which were active in consumer, business and mortgage lending was hidden. Where were the regulatory authorities who one would like to assume were intelligent enough to recognise that if it walks like a bank, talks like a bank and quacks like a bank it's probably a bank and should be regulated as one.

I know that the easy answer is that this massive parallel banking system which at its' peak was similar in size to the traditional banking system fell between the cracks of the Fed, the SEC, the OTS and any of the Finance Committees of the Senate or Congress!

Now of course, after the horses have bolted all of these organisations are falling over themselves to re-regulate, some of which will be good, and other parts such as separating derivatives and proprietary trading activities from banking which I believe will be bad-but that is a different discussion.

I think the clearest indication of where the problem lies is in the attempt by the mortgage community to stop an amendment to tighten up the documentation required by Fannie Mae or Freddie Mac. Among other things, the document which has to be signed by the servicer, says that the servicer acknowledges that providing false or misleading information to Fannie Mae or Freddie Mac (which are helping the Treasury run the program) may constitute a federal crime.

Imagine that! How preposterous to suggest that providing false or misleading information may constitute a federal crime. Like lying on your Income Tax. It's called Fraud. It's been at the root of almost every financial crisis.

Just ask the Greeks.