Banks Game Dodd-Frank to Irrelevance

Michael CorleoneDean Baker wrote a very short but action packed article this morning, The Banking Industry Wins on Risk Retention With Mortgages. It is following up on Floyd Norris’s article in The New York Times, Banks Again Avoid Having Any Skin in the Game. It is all about the securitization of home loans. This probably sounds familiar because this is what wrecked the economy back in 2008. Given that the financial industry didn’t get harmed for what they did before, like a spoiled child, they never learned.

Norris explained that part of the Dodd-Frank law was to have required “risk retention” or “skin in the game” in their real estate securities. So when a bank bundled up a bunch of mortgages and sold them, it would have to keep a 5% interest. But there was a way around this. If the mortgage was considered super safe, this 5% risk retention wasn’t necessary. What made a loan super safe was if the borrower had a substantial down-payment. For example, if someone put down $100,000 on a $200,000 house, it was unlikely to be a problem because the home would have to go down in value by 50% in order for the bank to lose any money.

But this isn’t going to happen. The problem is that the banks had a lot of support in wanting to get rid of any requirements on loans. The economy is sluggish and people are having a hard time getting loans. So a chorus of voices rose up and said that we must do everything we can to encourage the banks to loan. Sigh. I am so tired of this. This is the neoliberal hellscape we now live in. It would be easier if the government just loaned the money directly. But instead, we have to allow private banks to enrich themselves making home loans, which the government guarantees. The banks do a useless job for a lot money at no risk to themselves.

The bottom line is expressed by Barney Frank, “The loophole has eaten the rule…” Except it is worse than that; maybe it would be better to say, “The loophole ate the rule and then died of poisoning.” And the truth is that it probably doesn’t matter. But bad policies are always enacted when they seem reasonable. It seemed reasonable for Bill Clinton to destroy welfare as long as the economy was doing great. It was only after the dot-com crash that it became clear that we still needed welfare as we had known it. So sure, the securities will be fine this year and net year. They may even be fine for the next decade. But eventually, we’ll see the same thing happen again.

Dean Baker pointed out that loans with no down-payments were four times as likely to default as loans with a 20% down-payment. He added, “It is also worth pointing out that the cost of requiring that banks retain risk on low down payment loans did not mean that people could not get loans without large down payments as often claimed.” It simply would have made loans slightly more expensive. But that was not how it was presented.

The the banks have won. Again. Just as expected. I remember back when we were in the middle of the crisis in 2008, there were bankers saying that the government really did need to regulate the banks because the bankers just couldn’t help themselves. But after the government stepped in and saved them, their tunes changed. Even the most minor of regulations were met with screams, “Socialism!” The bankers managed to water down the initial Dodd-Frank law, which was bad enough. But laws always have to be turned into policies by the bureaucracy. So the bankers have been working that system as well. And in the end, the people of the United States get the Michael Corleone deal that we can’t refuse, “Nothing.”

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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