Why we all need to know more about mortgages
by. Henry Meier
The SEC was literally asleep at the switch during the early days of the mortgage meltdown. Although it has made some marked improvements in its oversight of the financial industry, its glacial movement in implementing Dodd-Frank mandated reforms makes it quite clear that it is as reluctant to impose requirements on its regulated entities as the CFPB is zealous in dreaming up new and creative ways to protect the American consumer from himself.
So it’s big news whenever the SEC finally gets around to implementing Dodd-Frank requirements and even bigger news when, on balance, the proposal is one that makes a lot of sense. In fact, at the risk of insulting the CFPB, the proposal the SEC is reportedly finalizing today should nudge the CFPB to take a second look at its proposed revisions to HMDA regulations. Humor me a little bit and you will see where I am going on this one.
Asset-backed securities are a broad categorization of bonds comprised of pools of assets ranging from student loans to car loans to everyone’s personal favorite in the industry — mortgage backed securities. Purchases of these bonds are repaid with the revenue from consumer loan payments. These bonds are typically broken into tranches with more conservative investors getting less of a return but being first in line to get paid in the event that the loans start going delinquent.
As credit unions are painfully aware, in the pre-financial crisis days regulations permitted institutions like the corporate credit unions to rely on ratings agencies when deciding whether or not it was safe to buy an asset backed security like one comprised of mortgage loans. With 20-20 hindsight, we all know that this assumption was dangerously naïve. For the last several years, the question has been with what should the old system be replaced? New regulations require that institutions, including credit unions, no longer rely exclusively on rating agency determinations when buying securities, but as I have complained in previous blogs, it is unrealistic to think that most institutions have the expertise or access to information necessary to make the type of decisions for which they relied on the rating agencies. In addition, remember that all this is taking place against the backdrop of litigation in which credit unions have billions of dollars at stake in which the primary issue is the extent to which the bundlers and underwriters of mortgage-backed securities knowingly provided inaccurate information when selling securities that faded quicker than the Yankee’s playoff hopes. (Hey, at least we have the Jets and Giants to look forward to…Right?).
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