Mortgage Meltdown: Regulation or Re-creation?

It is startling to see how little anyone knows about the mess we are in. First they don’t understand how bad this is going to get. Second they don’t understand how it happened because they don’t understand the financial system. And third, they have no clue how to prevent this from happening again. They don’t even realize that it has happened before several times right here in this country. 

The Country, the States and even the Counties and cities are more or less organized around the concept of bicameral legislatures, with checks and balances from the executive and judicial branches of government.

In all of those governmental entities there is not one person who has the knowledge or the authority or the accountability for the Mortgage Meltdown. It is impossible to imagine any smart regulation coming out of our current approach, so the inevitable conclusion is that the Mortgage Meltdown, the dot com meltdown, etc., will all happen again. The players will change but the game is the same.

So the first thing is to throw out all the proposals for future regulations or simply accept the fact that they won”t perform the basic purpose of government: to preserve society and protect the citizens from harm. 

Let’s get specific about the mortgage meltdown: it happenned because the private sector was able to create the equivalent of money using investor cash under false pretenses. It also happened because the participants were able to do it without perceiving any risks or negative consequences to themselves.

While you might say that the mortgage meltdown has had plenty of negative consequences to the financail institutions and intermediaries who participated in this fraud, the fact is that very few of the decision-makers have suffered any negative outcome. They walked away with bonuses and golden parachutes. People who worked for them suffered loss of jobs and themselves are in difficult financial straits, but not the real decision-makers (the movers and shakers).

If you want this scenario to stop (yes it is still happening) then three things must be true:

1. Full disclosure to government must be filed with a governmental agency on any program that involves a loan. Visa and MasterCard require every card issuance program to be individually approved. If they understand this simple concept, certainly government can learn something from the private sector. No lender should be able to act as a pure conduit for a loan without losing their status as a financial institution. If that is what they want to do, they are a broker not a lender. Every lender should have risk or they should not get paid a dime and the borrower should be told that the lender has no interest in the loan other than getting the borrower’s signature so that the lender can make a profit. If the fair market value of the house is stated incorrectly then all parties who had knowledge, despite plausible deniability, should be accountable for the difference.

2. The risk of imperfect disclosure and failure to perform in accordance with the fiduciary duties of a lender should be substantial and obvious and should be felt by the decision-makers. The same holds true for the seller of securitized products to investors. The simple test is this: if the borrower or investor knew what the lender or securities seller knew, would they have done the deal? If not, the full loss should fall on the companies and individuals who created these flawed programs.

3. Securitization of loans is not a good thing unless the investor fully understands the security he or she is buying. Allowing plausible deniability through reliance on rating agencies and insurers will always leave the investors holding an empty bag. The sellers, the rating agencies and the insurers should be required to file in the public record everything they know about the security and what they did to assure themselves that the facts were true. Later, if the deal falls apart, investors have defendants who are in clear violation of their duties and government has a clear case for prosecution.

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  1. […] Mortgage Meltdown: Regulation or Re-creation? While you might say that the mortgage meltdown has had plenty of negative consequences to the financail institutions and intermediaries who participated in this fraud, the fact is that very few of the decision-makers have suffered any … […]

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