The
Wall Street Journal’s editorial staff (WSJ) disparages the Dodd-Frank Act
and the leaders of the financial regulatory bureaus. I agree with many of
those criticisms; but I distance myself from them on their horrified stance
against the Act, saying that: “The regulation micromanages bank decisions down
to the type and nature of loan.” The Dodd-Frank Act prohibits a “type” of loan
according to the innately deceptive “nature of [the] loan.” The Act disallows
liar’s loans. The WSJ believes this ban so atrocious, so evidently an
infringement of the divine right of banks, that it calls it “micromanage[ment]”
and presumes that the word establishes the irrationality of prohibiting liar’s
loans.
As I have been
discussing for more than twenty years, no truthful lender would make liar’s
loans. Here is George Akerlof and Paul Romer’s clarification of the analytics
in their well-known 1993 article in which they specifically alluded to my
explanation. Notice the creepy manner in which they explain the explicit
underwriting failures that characterized liar’s loans ten years later.
“[An officer] who is
betting that his frugality might in reality create a profit would never operate
the way many thrifts did, with total disregard for even the most essential
tenets of lending: keeping sensible records about loans, safeguarding against
external fraud and abuse, counter-checking data on loan documentations, even
striving to have applicants fill out loan forms for applications. 5
5. Black (1993b) vigorously makes this point” (1993: 4 & n.
5).
When a lender fails to observe “even the most elementary guidelines of lending” it will incur grave losses. The controlling officers, however, will be made rich by making sloppy loans. Indeed, Akerlof and Romer emphasized that accounting control fraud is a “sure thing” (1993: 5).
When a lender fails to observe “even the most elementary guidelines of lending” it will incur grave losses. The controlling officers, however, will be made rich by making sloppy loans. Indeed, Akerlof and Romer emphasized that accounting control fraud is a “sure thing” (1993: 5).
Here are the five most
notable warnings of the mortgage industry’s anti-scam unit (MARI) that the
Mortgage Bankers Association sent to practically all significant mortgage
lenders as early as the start of 2006:
· Stated income loans “are
open invitations to con artists”
· Study: fraud occurrence
is “90 percent”
· “[T]he stated income
loan deserves the label utilized by many people in the industry, the ‘liar’s
loan.’”
· “Apparently, many people
in the industry have little … understanding of the mess produced by
low-doc/no-doc products that were in fashion in the early 1990s. Those loans
created hundreds of millions of dollars in losses….”
· “Federal regulators of
insured financial agencies have voiced out concerns about safety and soundness
regarding these loans….”
Even Ben Bernanke, the
Nation’s chief anti-regulator, used the Fed’s distinctive statutory power under
the Home Ownership and Equity Protection Act (HOEPA) of 1994 to proscribe
liar’s loans in mid-2008. Bernanke deferred the effective date of the rule by
15 months because one would not want to give a deceitful lender a hard time.
Alan Greenspan
disregarded Fed Member Gramlich’s popular warnings about non-prime loans and
also rejected his plea that Greenspan send the Fed’s analysts into the bank
holding company affiliates to uncover the real story. The Fed’s supervisors
were subjugated to the menial role of asking the systemically dangerous
institutions (SDIs) what kind of loans they were making (a procedure that would
definitely lead to significant understatement by the SDIs).
“Sabeth Siddique,
[queried] large banks in 2005 …how many of which types of loans they were
originating. Siddique discovered the data he obtained “very alarming,”
[N]ontraditional loans comprised 59 percent of originations at Countrywide, 58
percent at Wells Fargo, 51 at National City, 31% at Washington Mutual, 28.3% at
Bank of America, and 26.5% at CitiFinancial.
