I thought that this editorial from the Wall Street Journal made an interesting follow-up to my musings of yesterday. I don’t entirely agree with their editorial position but I wanted to quote some key passages:
“Vulnerabilities of nonbank mortgage companies can amplify shocks in the mortgage market and undermine financial stability,” Treasury Secretary Janet Yellen declared. A new report by the Financial Stability Oversight Council (FSOC) finds “their specialized business model means they are especially susceptible to macroeconomic fluctuations in the housing market.”
The Dodd-Frank Act established FSOC to monitor and manage risks to the financial system, and progressives want to grab more control over non-banks. Regulators are using the risks they created to justify putting non-bank mortgage servicers under their thumb—and available for taxpayer bailouts.
According to FSOC, non-banks originate two-thirds of mortgages and service 54% of balances, up from 39% and 4% respectively in 2008. After the financial panic, the report says “banks pulled back from mortgage origination and servicing in part due to heightened regulation and sensitivity to the cost and uncertainty associated with delinquent mortgages.”
What happened to cause this change? The bank capital rules put in place following the 2008 panic made the business model attractive while lack of oversight and low interest rates made them possible and profitable.
Mortgage companies are regulated by the states and don’t have to comply with the Federal Reserve’s regulation. Most draw on bank credit lines or issue debt to finance loans, which are securitized and sold to investors.
FSOC says many mortgage companies are highly levered and could experience stress if banks reprice their credit or cut them off. Why might this happen? Rising interest rates and stricter bank capital standards such as those recently proposed by the Fed.
I do not work in the financial sector and haven’t had a mortgage for some time but that raises a question for me: what is a bank? I think that if they’re accepting deposits and making loans, they’re banks and should be regulated like banks.
I also do not approve of the federal government guaranteeing private profits but I also do not approve of the federal government taking the entire mortgage business over.
What’s the right policy?
Tying the two posts together if these mortgage companies are borrowing and making loans, they, too, are creating money. I wonder if the Federal Reserve is taking that into account?
These mortgage companies aren’t taking deposits. As it mentions, they aren’t retaining the loans, but rather securitizing it and selling it to investors (generally through Fannie Mae/Freddie Mac).
To be honest, its very unlikely mortgage companies is a high source financial risk. The underlying housing market is relatively strong; if one look at the amount of mortgage debt outstanding, demand / supply for housing, or that real estate is a hedge against inflation.
Then why is Sec. Yellen saying that they are?
Tying the two posts together if these mortgage companies are borrowing and making loans, they, too, are creating money. I wonder if the Federal Reserve is taking that into account?
No, they are not. It is why I blather on and on about the financial system. This is what occurs when the financial system is used as the main economic generator.
When Dodd-Frank was being created, was Sec. Yellen concerned? If not, what did she think was going to happen? There are a limited amount of creditworthy borrowers, and lending to everybody else will never end well.
Freddie and Fannie should have been outlawed in 2008. They are basically money laundering operations.
From a progressive mindset, a government takeover and forgiveness plan would make sense. Basically, the government creates the problem, and then, the government steps in to fix the problem.
Unfortunately, the progressive mindset is fantasy based, and “free-market capitalists” are just fine with allowing the problems to be created. Neither understand how the monetary system works. Dodd-Frank was garbage not because of the additional regulations. It assumed that it could regulate an unfettered financial system.
If a person wants to borrow money, there is at least one other person that will lend them money. Loan sharks exist for a reason.