Former Congressman Barney Frank, who served decades as the Democratic representative from Massachusetts and a formidable voice on the progressive side of the aisle, sat down with HousingWire the day before his keynote address at the IMN/Structured Finance Industry Group’s ABS convention.
Casual, dressed in khakis and grey pullover, he went unnoticed by many in the industry who hiss a little when they say the name of his eponymous, co-authored bill, the Dodd-Frank Wall Street Reform Act.
Mentioning his coming book, the former congressman was charming, personable and candid in a way that was unexpected from those who watched his career as an often-fiery voice for the liberal perspective.
HousingWire: What has been implemented in Dodd-Frank that is most critical in your view?
Barney Frank: I think the most important thing is moving derivatives out of shadows and into a situation where it is very unlikely to see a major respected institution like AIG about $170 billion in debt beyond what it could pay but not having any idea how much it actually owed. We moved to getting derivatives to a case of us saying this should be a market situation and it’s a good idea, but it should be an open situation in the open market.
Second, we increased capital in institutions to where they could pass every stress test.
And third, not related, is the establishment of the Consumer Financial Protection Bureau. It has not had the systemic problems or abuses that those in the House Republican side have said it would. It’s been very effective.
HW: Have regulators lost sight of the fact that Dodd-Frank was meant to end “too big to fail?”
Frank: I think they’ve done everything they could. There’s this stupid notion that a regulator is doing a favor by designating a financial institution as systemically important. We do recognize there are institutions that are institutionally too big to fail without doing something about their debts. But that’s different.
HW: How would you rate the CFPB?
Frank: I think they’ve done an excellent job, and they did not cause any of the problems that they were accused of, because no one can come up with an example of where they have. Then there’s this bizarre argument that there’s no oversight. (House Financial Services Committee Chairman Jeb) Hensarling has all these hearings to say that there’s no oversight.
And by that argument, there’s no oversight of the FDIC, the OCC or the Federal Reserve, because they’re not subject to appropriations either.
HW: Why were regulations on credit ratings agencies specifically omitted from Dodd-Frank?
Frank: We thought it was best to remove from statute books any regulations and requirement that an investor rely on ratings agencies. The best thing in my mind is for people to do their own due diligence. But if you want to (rely on ratings agencies), great, but it took away any federal imprimatur. They went for the standard of recklessness and not negligence that I would have wanted.
HW: Now that you’ve seen the bulk of Dodd-Frank implemented, where do you think you got it right, and is there anywhere you think you got it wrong?
Frank: I do believe securitization without risk retention is trouble. It substantially diminishes the incentive to be careful if no one has responsibility. At the last second (former Sen. Mary Landrieu, D-La.) introduced QRM and to my great dismay the loophole swallowed up the rule.
HW: What should be the future of Freddie Mac and Fannie Mae?
Frank: I think it would be better to replace them because they have basically become government agencies – between Fannie, Freddie, and the FHA, the government has too large a market share.
People on the House Republican side want to abolish them entirely. (I could see) chartering from the federal government a set of companies that would sell an interest rate hedge to lenders, not government-run but that would create a framework – but that’s too much government for House Republicans.
Mel Watt just did something we’ve been eager to do and that is to help build very good rental housing (through funding the Housing Trust Fund.)
HW: How do you walk the line between preventing discrimination and promoting affordable housing and homeownership on one hand, and not having lenders make risky loans on the other?
Frank: No regulator has said — it is not black people who don’t get a mortgage and white people that do – it’s that black people who are identically economically situated are getting worse deals – and the HMDA data shows this.
The other conflict people have greatly exaggerated is the importance of homeownership and the myth of homeownership benefits. Larry Summers would say no one has ever washed a rental car. But they do wash a leased car that they are going to be in for some time. I don’t want to tell lenders who is a good risk and a bad risk. I just want to say you make whatever judgment you want to about credit worthiness. But you have to retain some of the risk.
Homeownership is not a good way for poor people to save – I think there are other ways.