“How To Untangle The Regulatory Knot”
Bob Broeksmit
Exchequer Club
Washington, D.C.
Wednesday, May 15, 2024
Good afternoon! It’s an honor to speak to a group I’ve known so well for so long. I’ve been a member of the Exchequer Club for the last decade or so. I’ve lost track of the many great experiences and good friends I’ve discovered here.
Yet while I’ve sat in the audience many times, I never thought I’d be the one giving the speech. To Faith, thank you for this opportunity. And to all of you who’ve shown up—thank you for being here. I hope to put fewer than half of you to sleep.
My topic this afternoon is familiar to many of you. It’s the administrative state—the alphabet soup of regulatory agencies that increasingly determines the course of our economy. The bureaucracy is essential to modern society’s functioning, and I think we all agree that sound regulation matters now more than ever.
This realization has spurred both Republicans and Democrats to steadily give the administrative state more authority while adding more agencies to the mix. The growth of the administrative state, however, has led to a corresponding growth in regulatory confusion.
Many industries are now governed by multiple agencies that, despite their overlapping authority, often under-collaborate. They may meet often, but they rarely coordinate. Contradictory regulations are often issued from multiple sources—and sometimes, from the same source. Overall, there’s too little regard for how such mandates interact, much less how to implement orders that are at odds with each other. And in some cases, agencies now show a shocking ignorance about the very industries they regulate.
Taken as a whole, the administrative state is creating what I call “regulatory knots.” As these knots grow, they restrict and even strangle businesses and consumers. To be clear, I’m not discussing mere over-regulation, which is a real problem. Rather, I’m advocating for regulatory clarity and consistency. We need to untangle the regulatory knot, for the sake of the American people. They’re the real victims here, and as long as the knot exists and keeps getting tighter, it will sap our country’s economic strength.
My understanding of this issue is shaped by my role at the Mortgage Bankers Association and as a career-long mortgage practitioner. We represent an industry that encounters the alphabet soup of federal agencies every day, in endless ways. Our current experience perfectly illustrates the rise of regulatory knots.
Now, don’t worry: I’m not here to give a speech about real-estate finance—that would bore you. But I will use our experience to show what the knots look like, who they restrict, and why they matter. Finally, I’ll share some thoughts on how we can untangle them.
The mortgage industry is the perfect case study because of our enormous impact on America. We’re a key component of the housing market, which makes up a critical part of the US economy. We originate trillions of dollars in mortgages every year. All told, we’ve made it possible for more than 65% of American households to own their homes. At some point in their lives, most families will lean on mortgage lenders to help them achieve their life goals.
But the numbers are only part of the story. The mortgage industry is the cornerstone of the American Dream. We give people of all backgrounds and beliefs the foundation for generational success. And during the dark years of COVID, real estate finance was among the country’s brightest lights. We enabled an historic surge of home purchases and refinances, supporting the economy when it mattered most.
I don’t say these things to brag, though, of course, I’m proud of our impact. Rather, I say them to provide context. Given the size, scale, and importance of our industry, you’d think the regulations that govern us would be carefully crafted. You’d think federal agencies would work together to regulate us responsibly while protecting our ability to serve even more Americans. And of course, you’d think regulation would be simple, straightforward, and sensible so that the benefits would exceed the costs.
But it’s not. Not even close. There are too many cooks in the regulatory kitchen—and they’re too often using different recipes.
As is often the case, this problem has been building for years. In the aftermath of the Great Recession, MBA put together a chart of the various federal agencies and authorities that govern housing policy. There were more than a dozen, and each one was charged with implementing multiple laws. Some laws gave several agencies regulatory power over the same rules.
We put everything into the chart, drawing lines between the agencies and the laws. The final version looked like a spider web—a confusing jumble of crisscrossing strands. It was the earliest version of the regulatory knots that I’ve described. Regardless of the name, we were trying to illustrate the convoluted nature of housing policy regulation and the resulting consequences that hurt consumers.
To be clear, not all the rules were bad. Some, like the Qualified Mortgage rules, were salutary and important to the strong, stable mortgage market we have today. But there was—and still is—little coordination and attention to the overall compliance and implementation burdens and costs.
A few weeks ago, after I was asked to give this speech, I asked my team to update that chart. It should surprise none of you to know that the regulatory knot is more confusing than ever. For instance, we’re now dealing with the Dodd-Frank law, which created the Consumer Financial Protection Bureau. The CFPB has claimed sweeping new authority over various pieces of housing policy, adding many more strings to the knot.
Now, as industry representatives, our job is to meet and work with every agency and official we put on that chart. But as the knot has grown, it’s become all but impossible to effectively collaborate with all of them. There are just so many people pushing so many policies.
It’s not due to lack of effort – it’s lack of time. Over the past few years, new regulations have been rolled out at a breakneck pace with little regard for how they affect each other, much less our industry and, more importantly, the consumers we serve.
The best example is what’s currently happening at the CFPB. Right after the State of the Union, the bureau suddenly announced in a blog post that it would soon target what it called “junk fees” in mortgage closing costs. The bureau stated unequivocally that such fees drive up costs unreasonably, and it asked consumers to submit complaints. The CFPB is now collecting information, presumably as a precursor to issuing a regulation or guidance that could force lenders to absorb these costs.
But here’s the thing: These fees they are targeting? By the White House’s own definition, none of them are junk fees. What’s more, many of them are for services required by other federal agencies.
According to the White House, a junk fee isn’t disclosed to consumers. But everything the CFPB mentioned is thoroughly disclosed early in the process, and in a supreme irony, these fees are disclosed because of CFPB regulations, on forms designed by the CFPB itself. In 2015, the bureau comprehensively reformed mortgage disclosures to ensure that consumers have full transparency and locked-in pricing for most mortgage costs. It simultaneously empowered borrowers to shop for these services to obtain the lowest costs.
If these are “junk fees,” then the word junk has no meaning. Moreover, the bureau even touted the success of the revamped disclosures just four years ago. Now it’s saying the problem is worse than ever, despite already having provided a solution.
But there’s another, more important problem. What the CFPB calls “junk fees,” federal agencies call mandatory. They pay for services like appraisals, credit reports, and flood certifications, which are required precisely because they’re integral to a sustainable mortgage market, provide benefits to borrowers, and protect taxpayers.
Today, Fannie Mae, Freddie Mac, the Federal Housing Administration, the Department of Veterans Affairs, and the USDA can’t guarantee a mortgage without these things. They are obligated to require the very thing the CFPB may be moving to force mortgage lenders to absorb.
It’s mind-boggling. And it gets worse, because the White House is in on the madness. The CFPB’s campaign against legitimate and legally required fees, including, of all things, discount points, came a day after President Biden floated a proposal to scrap title insurance. But again, clear title, which protects borrowers, lenders, and investors, is required by Fannie and Freddie before they purchase a loan.
Such confusion poses a serious threat to a smoothly functioning market. And even if it’s just a political stunt, it betrays a lack of knowledge about the processes and policies that govern an industry that’s a critical part of our economy. Blog posts and the bully pulpit are no substitute for real, thoughtful, informed collaboration and regulation, and as this episode shows, they lead to contradictory and unworkable policies.
We need commonsense rules of the road. We don’t need regulators to build the car as they drive it at a hundred miles an hour!
I wish that were the only example, but it’s not. Another regulatory knot is threatening to strangle independent mortgage banks.
IMBs, as we call them, are absolutely critical for homebuyers. They originate about two-thirds of mortgages. And they’re especially important for underserved communities. IMBs are the primary source of credit for VA loans for veterans, FHA loans for low-income homebuyers, and RHS loans for rural families. And most minority homebuyers are served by an IMB.
Given the importance of IMBs, regulators must ensure they supervise them wisely—without injuring the tens of millions of Americans who rely on them. Treasury Secretary Janet Yellen recently testified to Congress about the need to preserve the credit that IMBs offer.
But then why is the Biden administration pushing regulations that would hamstring IMBs? Why is it ignoring the many sound regulations that already govern these mortgage banks?
This is just one of the realities of the so-called Basel III end-game proposal. It was drafted in collaboration with European regulators, and the U.S. has announced plans to implement it in the near future. Yet while the goal of Basel III is to strengthen financial markets, it will profoundly weaken the mortgage side of the market. It’s the definition of a cure that’s far worse than the disease.
Let’s look at Basel’s treatment of mortgage servicing rights. It places an absurd 250% risk weight on MSRs and significantly reduces the amount of servicing rights a bank may have on its balance sheet. Yet according to the Biden administration’s own Financial Stability Oversight Council, the current treatment of mortgage servicing rights has already driven banks out of mortgage lending and servicing. Limiting banks’ MSR holdings even further would only drive banks farther away from mortgages and weaken the entire market for mortgage servicing, severely impacting IMBs, many of whom buy and sell MSRs, and driving up costs for every borrower.
At the same time, by increasing the amount of capital that banks must hold against their warehouse lines, Basel III would make it much more expensive for IMBs to get credit from other banks, which is key to the IMB business model. All told, Basel III will lead to higher prices on fewer mortgages. That’s a disaster for Americans, especially first-time and low-income homebuyers.
And it’s especially bad for communities of color, which often have lower homeownership rates. On the one hand, the Biden administration is fighting hard to make homebuying more equitable. Yet on the other hand, with Basel III, the Biden administration is pushing a home even further out of reach for disenfranchised communities.
The contradiction is astounding. But I’m even more surprised at how we got here. After decades of drafting housing regulations, our regulators have now outsourced a key part of the job to Europe.
Why on earth would we let unnamed and unaccountable European bureaucrats call America’s shots? Their housing market looks completely different. They don’t have mortgage servicing rights. They don’t have our culture of homeownership. And they definitely don’t have a pre-payable 30-year fixed-rate mortgage—the crown jewel of the American system.
The last thing we should do is let them write the rules that govern us, layering their red tape on top of our own. If we go down that road, we’ll create a regulatory knot so tight, it can never be unraveled.
The Biden administration frequently talks about making homebuying more equitable. Yet with Basel III, it’s going to worsen inequities and push homes out of reach for millions of people. For the sake of low-income, minority, and first-time homebuyers, who are disproportionately harmed by the baffling proposed risk weights on low downpayment mortgages, we need to untie this regulatory knot, and fast.
There are many more examples I could name, and not just when it comes to home mortgages.
For instance, when it comes to affordable rental housing, the Biden administration is rightly pushing to expand supply. Yet at the same time, HUD has enacted a kind of rent control on many properties. That will cause many developers to restrict supply.
Once again, the victims will be low-income families, including many in communities of color. The federal government should pursue a concerted strategy to create more affordable housing—and the place to start is by repealing or reforming the real junk fees that litter HUD.
Today, HUD charges lenders over 22 fees that are duplicative, unnecessary, or downright expensive compared to private sector options. These fees help explain why HUD has produced 75% fewer multifamily loans over the past two years. It’s the most expensive and least efficient place to originate a multifamily loan. The federal government should solve problems like that, not create new regulatory knots.
At this point, I want to take a step back and look at the consequences. The tightening of these knots makes it harder for mortgage companies to provide their services to the American people. They’re constantly being whipsawed, trying to understand the competing and contradictory rules that govern them.
Finding out isn’t exactly cheap. Mortgage companies are spending more than ever on regulatory compliance. But that leaves less money to spend on innovation and customer service.
None of this helps the millions of Americans who want to buy homes. They face higher costs and fewer options. It’s like the administrative state is conspiring to hurt the very homebuyers it purports to want to help.
There’s one more harm I want to mention. It may be the most concerning of all. As the regulatory knots grow and tighten, consumer trust in the mortgage industry falls. Take the supposed junk fees that I mentioned. The CFPB is telling consumers that lenders are out to get them. In fact, lenders are following the law. Ditto the regulations that raise costs while limiting options. They give the impression that the mortgage industry is sticking it to consumers. But the true fault lies with the bureaucracy, not business.
Don’t get me wrong. The mortgage industry has made mistakes in the past, and consumer trust plummeted. Thankfully, in the wake of the Great Recession, the combination of industry action and prudent regulation helped restore that trust.
Let’s look at what we have today. An industry that values sensible rules of the road and invests more heavily than ever in compliance and a quality consumer experience. Quality underwriting practices that ensure that, despite fierce competition, lenders are competing on price and service, not loose underwriting, as some did before the financial crisis. And despite the pandemic and recent natural disasters, we have near-record low delinquencies and servicers that helped more than 8 million families enter and then exit pandemic-era forbearance while retaining their homes.
This progress couldn’t have come at a better time. We’re living in an era of economic uncertainty and demographic change. In this new era, the mortgage industry is desperately needed to help future generations achieve the American Dream. Regulators should be fostering more trust in mortgage professionals. Instead, they’re turning people against the help they need to achieve their future.
This isn’t just a problem. It’s a crisis—and we have to address it immediately. It’s in that spirit that I’ll now turn to some proposed solutions.
Whether it’s in mortgage finance or any other industry, regulatory knots exist because no one has the ability to untangle them. The current system allows far-flung agencies to issue far-reaching rules, without consulting each other or even considering the rest of the regulatory landscape. The buck doesn’t stop anywhere.
But it should stop somewhere, with someone. That’s why I’m proposing a “National Housing Policy Director.” This is not a new idea, but with the CFPB and FHFA effectively no longer independent agencies, it is much more achievable.
This position would bring order to the chaos. The Director would oversee every policy that affects housing, no matter which agency it comes from. The official, and his or her team, would have a deep knowledge of existing laws and regulations, enabling them to spot contradictory rules from a mile away. And the Director would be empowered to stop agencies from making regulatory knots worse, and better yet, start the long overdue process of unraveling them.
I envision putting the Housing Director directly in the White House. Now, some of you may be thinking: Doesn’t the White House already do what I just described?
Not really. The White House has some staff who deal with housing, but there’s no senior- or even Cabinet-level official who has cross-agency authority on housing. This can’t just be part of someone’s job. It needs to be their full-time job—twenty-four-seven, with a dedicated team to boot. There’s no other way to grapple with such a massive issue.
Naturally, the Housing Director would still be accountable to the President. And I fully understand that even with such a position, different presidents would pursue different policies, some of which the industry may not like. But that’s far preferable to the current system.
My proposal for a Housing Director is a basic matter of good government. It could be adopted for other industries. And there’s also precedent. The Director of National Intelligence was created two decades ago to address the very concerns I’ve mentioned today. At the time, in the wake of September 11th, the intelligence community was overseen by fragmented and often competing agencies. The Director makes them work together, ultimately strengthening national security.
We need the same kind of streamlined, collaborative, and commonsense leadership when it comes to regulating the most important facets of our economy. The current approach is clearly failing. The costs are too high, and so are the stakes. We need to encourage a new era of safe growth, trust, and innovation, not continue this slouch toward stagnation and discontent.
The mortgage professionals I represent are more than ready to lead the way. So are you, as leaders in many other industries and fields. Now it’s time we had the leadership in government to match.
Thank you. I look forward to your questions, including about last week’s FSOC report on independent mortgage servicers.