It’s in the nature of the recent pro-cyclicality: recoveries must work backward. Think about it. In some way, if the housing collapse started the ball rolling towards a precipice of financial ruin, the likelihood remains that it will be the last to be fixed when all is said and done. Indeed, a very recent announcement from the Federal Reserve shows hard evidence of progress in credit card regulations as mandated by the Truth in Lending Act (TILA)… well, I guess it’s progress. The advance notices required don’t seem to greatly impact lender behavior. And showing that paying a little more each month will save a whopping $1K over the course of seven years may help some consumers make more reasonable choices in payback schemes, but where is the protection? The issue of piling on unmanageable debt remains unaddressed, even though our publisher suggested two years ago that it should; across Western finance, people are flocking to their cards for less-than-discretionary purchases. So, will we see the widespread refinancing of monthly mortgage payments through credit cards? Of course, the Real Estate Settlement Procedures Act (RESPA) falls under TILA as well. And although some big changes went into effect this year, enforcement is not a real threat at this time. Tech companies have been flocking to tout compliant-software, so we have again a ‘solution’ presenting itself. But I don’t know if the urgency really exists to implement it. When you get down to it, there are two factors missing from attempts to restore the economy thus far: activism, and a benchmark. In financial jargon, what’s lacking is the motivation of what’s called a reverse inquiry, where an investor says, “I have money, and I want this type of financial product.” Where are the demands for options? If anything, in mortgages especially, choice has been reduced to something only Henry Ford could truly love: you can have any sort of mortgage you want, so long as it’s a fixed rate with 20% down. To reach something resembling lasting economic recovery, I’m convinced we actually need more mortgage products to appeal to a wider array of borrowers, not fewer and narrower. We’ve already learned that some approaches to lending don’t get us where we need to be. But why give up on financial innovation altogether? Why throw the baby out with the bathwater? Calls for more credit options for businesses are at least gaining government traction in the UK…. Which brings up the final speed bump: any successful product should be traded against a benchmark. In the case of mortgages, investors aren’t sure what the fairest value really should be for a security — at least, one not already backed by the full faith and credit of the U.S. government (and of the Henry Ford variety). They do, however, know the value of anything other than that is most decidedly less than par. If ever there was a need for innovation, this appears to be that time. The problem of restoring investor confidence is systemic, too, reaching even into something as seemingly mundane as rep & warranties. Industry colleague Sue Allon at due diligence specialist AllonHill wrote about this on her blog this past Monday, musing if investors will be asked “to put a bag over their heads and buy bonds on blind faith that originators will stand behind the loans they sell, or will investors will be given the teeth they need to enforce their rights with originators that aren’t trustworthy.” Allon’s point is one that perhaps U.S. taxpayers — as the primary investors in U.S. mortgage markets these days — might want to be asking, too. After all, just imagine what happens if the U.S. government finally decides that mortgages are a bad investment. Write to Jacob Gaffney.