The last big mortgage debacle, the savings-and-loan crisis, was made mostly in Washington. The S&Ls were required by law to borrow short (via savings deposits) and lend long (via 30-year, fixed-rate mortgages). When that led to big losses in the inflation-racked early 1980s, Congress encouraged thrifts to grow their way out of trouble, in part by financing commercial real estate, with disastrous results.
This year’s mortgage crack-up comes with a different story line. It was made not in Washington but in the strip-mall offices of mortgage brokers and on the trading floors of Wall Street. The general rule this time around has been that the farther away from the prying eyes of federal bank examiners a transaction occurs, the more likely it is to cause trouble.
Does this mean we need more regulation? Maybe, maybe not. It does indicate, though, that the mortgage business might be due for a return to its roots. Read more.
By roots, I mean the bank and thrift industries. I wrote this with some trepidation, because I’m sure that in coming months we’ll start hearing about some big problems in bank and thrift mortgage operations. But I think the basic point will still stand: This mortgage mess was not the making of the insured, depository financial institutions. It was the independent lenders and their Wall Street backers that drove it.
One thing that I couldn’t go into much depth on in the column but that deserves more explanation is the regulatory structure for banks and thrifts and other mortgage lenders. Many people seem to have the idea that they’re all regulated by the Federal Reserve. But as somebody who used to cover the OTS, OCC and FDIC for the American Banker, I know that this is not so.
Federal savings banks–a.k.a. thrifts, a.k.a. the former heart of the home lending business–are supervised by the Office of Thrift Supervision (OTS), a part of the Treasury Department. National banks are supervised by the Office of the Comptroller of the Currency (OCC), also part of Treasury. Bigger state-chartered banks are supervised by the Fed, an independent agency. Smaller state-chartered banks (the bulk of the country’s banks) are supervised by the Federal Deposit Insurance Corporation (FDIC), another independent agency. This is serious regulation, with bank examiners coming in to look over the books, a lot of pressure to keep underwriting standards high, etc. The four agencies also work pretty closely together to keep their supervision consistent, although there’s at least talk in the industry that the OTS might be a little more (take your pick) lax/flexible/understanding/sophisticated when it comes to real estate lending.
Next come the operations that are part of a bank or thrift holding company but not the bank or thrift proper. These are overseen by the Fed if it’s a bank holding company, the OTS if it’s a thrift holding company. But they’re not subject to the same kind of regular prudential regulation as the actual banks and thrifts.
Then there are the independent mortgage lenders, which aren’t subject to direct supervision at all by federal regulators. They are supposed to obey federal Truth in Lending Act and Home Ownership and Equity Protection Act strictures against deceptive and unfair lending, and the authority to write regulations to conform to both those laws belongs to the Fed. But this isn’t the same as being regulated by the Fed. So I tend to wonder, when people say the Fed should have cracked down on all this earlier, how it could have done that, given that the most creative mortgage lenders were almost entirely outside its purview.