TheMReport

January, 2013

TheMReport — News and strategies for the evolving mortgage marketplace.

Issue link: http://digital.themreport.com/i/105753

Contents of this Issue

Navigation

Page 28 of 84

Feature W hen it was first proposed during negotiations over the DoddFrank legislation, the "Volcker Rule"—suggested by and named for former Federal Reserve Chairman Paul Volcker—was considered the answer to all that was wrong with Wall Street and the traders (both rogue and otherwise) who were behind the credit and the economy's collapse. The Volcker Rule could be the modern-day story of Rumpelstiltskin—not that it turns straw into gold, but because of its efforts to rein in the alchemy in the banking industry—and particularly in the mortgage banking industry, which attempts to convert mortgages of varying values into high-quality securities. In Rumpelstiltskin, a newly instated queen goes to great lengths to solve a problem brought about by manipulation and trickery, much as the Volcker Rule tries to do with the banking and housing finance industries. But unlike the fictitious tale, today's situation is very real, with the potential ramifications leading to what quite possibly could be a very unhappy ever after. Not So Bullish for Banks T he Volcker Rule will be six months old in early 2013; it took effect in mid-2012, two years after the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed. Like any precocious 6-month old, it is just beginning to crawl, unmindful of fragile objects in its path. "The Volcker Rule is a cornerstone of the 2010 DoddFrank financial regulatory overhaul," according to Scott Patterson, writing in the Wall Street Journal. "It effectively bans what's called proprietary trading—when a bank invests its own funds in order to make a profit—at institutions that have access to Federal Reserve funds and have federally insured deposits. It also limits how much those institutions can invest in risk-taking trading operations such as hedge funds." It was such trading that created a hole, nearly swallowing the banking and housing industry. The financial sector strongly opposed the rule, in part because it also forces banks to sell majority interests in hedge funds and private equity—major profit centers for those institutions—but other banks could be affected as well. "The Volcker Rule appears to put hardships on regional banks with assets of $50 billion and greater, as their base does not include investment but focuses on deposits and lending for retail and commercial business," said Deana Elkins, senior compliance officer at ISGN, a Melbourne, Florida-based company that provides mortgage services and technology. "Smaller regional banks will have higher compliance costs despite their non-participation in investmenttype banking as is done by larger banks. That effect, in turn, could cause limited liquidity availability for customers in these regional banks." The Volcker Rule, say commercial banks, shouldn't be able to make risky bets with federally insured deposits, according to an analysis in The Nation. "The Volcker Rule is best understood as an attempt to update the New Deal–era GlassSteagall for the 21st century," said Mike Konczal of the Roosevelt Institute. "Glass-Steagall called for a complete separation of investment banking—the activities of underwriting and dealing with stocks and debt— from deposit taking. Consistently weakened from the 1980s onward, Glass-Steagall was fully repealed in the late 1990s to allow Citicorp to merge with an insurance company." Brownback withdrew his own amendment. The rule made it into the final legislation when House-Senate conferees passed a strengthened version of it that included the Merkley-Levin language, which covered more types of proprietary trading than the original rule as proposed by the administration and also banned conflict of interest trading. Conferees, however, changed the proprietary trading ban to allow banks to invest in hedge funds and private equity funds. Proprietary trading in Treasuries, in bonds issued by government-backed entities like Fannie Mae and Freddie Mac, as well as in municipal bonds was also exempted. A Bumpy Start An Uncertain Adolescence T he Volcker Rule has a rocky, if somewhat circuitous, legislative history. It was endorsed by President Obama in January 2010 and then by five former Treasury secretaries one month later. But then it ran into a series of legislative roadblocks and detours. Congress began to consider a weaker bill allowing federal regulators to restrict proprietary trading and hedge fund ownership by banks, but not prohibiting these activities altogether. Sens. Jeff Merkley (D-Oregon) and Carl Levin (D-Michigan) introduced the main piece of the Volcker Rule—its limitations on proprietary trading—as an amendment to the broader Dodd-Frank legislation passed by the Senate that May. Though it had widespread support in the Senate, the amendment was blocked by an objection from Sen. Richard Shelby (R-Alabama) and never voted on. Merkley and Levin responded by attaching it to another amendment to the bill offered by Sen. Sam Brownback (R-Kansas), but before the vote, As it matures, what the rule means for housing finance is unclear. "It is hard to say exactly what the impact will be," said Becky Walzak, president and CEO of Walzak Consulting, in Deerfield Beach, Florida, "but I suspect lenders trying to deal with the QM [qualified mortgages] and QRM [qualified residential mortgages] regulations will struggle with how to restructure their approach to selling consumerbased loans. I fear it will have a negative impact on those private securitizers that are starting to look at re-entering the market. Others, however, may see this as an opportunity that has been unavailable to them due to the dominance of the larger banks." Richard Booth, a certified mortgage banker and mortgage industry consultant in Neptune, New Jersey, was less sanguine. "It is more uncertainty for an industry trying to recover," Booth declared. "The rule could make borrowing more expensive. If money becomes more difficult The M Report | 27

Articles in this issue

Archives of this issue

view archives of TheMReport - January, 2013