Don't Rush on Mortgage Regulation

Lora Bentley

As complexities of the subprime lending scandal come to light, observers from every side are calling for regulation of the mortgage industry. Some say extending Sarbanes-Oxley will do the trick, but others aren't so sure.


In a Financial Times commentary published in Business Spectator, John Gapper warns lawmakers not to be in too much of a hurry:

Take a deep breath, everyone. The last time that right-thinking Americans agreed on the need for more regulation as rapidly as possible, we got Section 404 of the Sarbanes-Oxley Act. Accounting firms were given a vague and onerous mandate and, the next thing anyone knew, New York was losing its financial strength to London.

To avoid unintended consequences such as those that have cropped up after Sarbanes-Oxley, he says, "proceed slowly."


Secondly, consolidated regulation would be easier than creating an entirely new regulatory scheme and agency to oversee it. For example, Gapper suggests "[g]iving overall responsibility to the Fed, while allowing the SEC to carry on regulating broker-dealer operations."


Thirdly, he says that Congress shouldn't try to get investment banks to stop using securitization and other investment vehicles. Instead, there should be more incentives:

Instead of lots of new regulations, we need better incentives. Banks made too many sub-prime and junk loans and over-leveraged the financial system because they did not believe they would suffer if the borrowers defaulted (although, as it turns out, they were wrong about that)...In [the] future, they need to have reasons to fear losses as much as they covet profits.

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