In prepared remarks delivered to the Exchequer Club earlier this week, Office of Thrift Superivision Director John Reich suggested that federal regulators be allowed by Congress to expand their authority to include oversight of mortgage banks. Many Wall Street investment banks currently operate outside of the regulatory authority of the OTS and other federal regulators, something Reich said creates "an unlevel playing field." From his remarks:
I have heard comments from executives at federally regulated financial institutions that a level playing field does not currently exist and I have to agree with them. Many of the abuses in home lending have come from a side of the mortgage market that is outside the reach of federal regulators, and in many cases also outside the reach of the states. Current supervisory structure provides minimal accountability—and represents a continuing force for tipping the competitive balance in the home mortgage marketplace in favor of entities that play by less stringent sets of rules ... The other area of concern has been the funding of mortgages that were poorly underwritten and/or that had predatory pricing and lending terms. Again, Congress has the ability to address funding abuses by imposing much needed oversight and accountability for mortgage banks. The OTS has extensive expertise in the oversight and supervision of mortgage banking operations that I believe would benefit the currently unregulated mortgage banking market. As I have said in the past, the OTS is not asking for expanded regulatory authority, but if Congress determined that our agency could provide the best solution, we would rise to the challenge.
Reich also said he supported federal registration and oversight of mortgage brokers and loan originators, beyond his suggestion that the OTS might provide the "best solution" to regulating the third-party mortgage market. It's probably time to go on record right now and say that the mortgage banking industry is likely to become regulated in ways many in the industry probably never thought possible in the past decade -- and how that regulation is enacted at the legislative level will do more than "level the playing field." It will change the game. Along with a few others in the industry that I've spoken with, I suspect Countrywide in particular already saw this coming, which is part of the broader reason for its recent retreat to a thrift charter. As legislators look to target the so-called "unregulated mortgage market," the impact on that part of the mortgage industry will probably end up being far more constrictive than the impact of making a move to the relative safety net of existing regulatory authority ahead of any new legislation.