Are regulators nostalgic for the banking crisis?
August 06, 2013
With only 16 bank failures so far this year, 2013 is on pace to have the lowest number of bank failures in five years. Is this relative stability causing some regulators to miss the action and excitement of the banking crisis?
That question is raised by a new government proposal that aims to loosen restrictions on the securitization of mortgage debt -- restrictions that were put in place to address some of the worst excesses of the housing boom.
Securitization of mortgage debt allows banks to treat mortgage risk like a hot potato -- or perhaps more like a hand grenade that gets tossed around until it blows up. Basically, securitization is the process by which banks bundle mortgages into securities and sell them to other people.
In the wake of the housing crisis, banks were required to retain a certain portion of their loan portfolios, so they would share in the risk. Presumably this would make them more responsible about which loans they approved. There were already exemptions to this requirement for most conventional loans, and now some regulators, including representatives of the Federal Reserve and the FDIC, want to loosen requirements for participation in riskier loans as well.
Banks responded to the mortgage crisis and the regulations that followed it by tightening underwriting standards. Those who advocate loosening securitization restrictions argue that doing so will support the housing market and make mortgages available to the wider segment of the population.
Impact on consumers
As quoted in the Wall Street Journal, former FDIC chairman Sheila Bair said the proposal to loosen securitization restrictions indicates that Washington has "lost its political will for serious reform."
But reversals like this are not unusual after a crisis has passed. As business improves, people forget the practices that got the industry in trouble in the first place, and start to chafe at anything that restricts them from doing more business when times are good.
As for the housing market, it doesn't seem to be suffering from a lack of support. Housing prices recently enjoyed a record monthly rise, and have regained their levels from 2004. What followed from there were the peak three years of the housing bubble. Do those who want more support for the housing market really want to see prices regain those dangerous heights?
Current mortgage rates, though higher than a few months ago, still enjoy the extraordinary intervention of the Federal Reserve to keep them low. It would be a raw deal for consumers if banks retained tighter standards when rates were low, only to loosen them when rates rose. Meanwhile, loosening those standards would put savings accounts and other deposits at greater risk, even though savings accounts have yet to see their interest rates follow mortgage rates upward.
The housing collapse and subsequent banking crisis was a bad deal for consumers the first time around. It would be a bad deal for them again if permissive regulators manage to engineer a repeat performance.