The Housing Chronicles Blog: Stronger rules for the mortgage market

Friday, March 14, 2008

Stronger rules for the mortgage market

Hoping to put safeguards in place that would eliminate any more mortgage and credit crises in the future, the Treasury Secretary Henry Paulson announced a series of new rules that would prevent another mortgage meltdown from occurring. From a story in the New York Times:

The nation’s top economic policymakers, hoping to prevent a repeat of the excesses that led to the mortgage bubble and bust, on Thursday proposed a broad series of reforms aimed at tightening oversight of financial institutions.

The changes include tougher disclosure requirements for banks and Wall Street firms, a nationwide licensing system for mortgage brokers and new rules for credit rating agencies, which have been widely criticized for failing to recognize major problems with mortgage-backed securities and for having potential conflicts of interest....

Mr. Paulson said the government was going to demand greater “transparency” from banks and Wall Street firms, stronger risk management and capital management and a better trading system for complex financial derivatives, such as collateralized debt obligations, that managed to transform risky subprime mortgages into securities with Triple-A ratings.

Echoing measures that Congressional Democrats have been drafting, the presidential group called for tougher state and federal regulation of mortgage lenders and a nationwide set of licensing and registration standards for mortgage brokers...

Mr. Paulson took particular aim at credit-rating agencies, such as Moody’s, Standard & Poor’s and Fitch, which gave AAA ratings to billions of dollars in mortgage-backed securities that turned out to be filled with delinquent loans.

Mr. Paulson said the rating agencies would have enforce policies about disclosing their conflicts of interest, an allusion to criticisms that the agencies were typically paid for their ratings by the investment banks who only paid once they had sold their securities to investors.

In addition, Mr. Paulson said the president’s group would push the rating agencies to “clearly differentiate” between the ratings for complicated structured investment products, which investors may not have understood, and the ratings for more conventional corporate bonds and municipal securities.

Issuers of mortgage-backed securities, in turn, would be required to disclose “more granular information” about the quality of the underlying loans and their procedures for verifying the information in those loans...

Senator Charles E. Schumer, the New York Democrat who is a member of the Banking, Housing and Urban Affairs and Finance committees, was both positive and critical about the proposals, saying in a statement: “The administration is finally moving towards where Congress was last year. The good news is, they’re beginning to put their toe in the water when it comes to government involvement to help the economy.

The bad news is, they’re going to have to do a lot more than that to address the problem. We need government action not only to solve the current crisis, but also to prevent a future one.”

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