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Analyzing the political lay of the land for housing reform

Brent Nyitray, CFA, MBA

Must-know: Mortgage reform and the future of housing finance (Part 4 of 5)

(Continued from Part 3)

What the two sides agree on

Both Republicans and Democrats agree that the current system is unsustainable. The government can’t continue to back 90% of all new mortgage origination. Both sides agree that credit became too loose during the housing bubble and both agree that credit is too tight now. Both parties agree that it’s paramount that the taxpayer be protected in case of another housing bubble, and that regulation has an important role to play in that protection. And, for better or for worse, both sides agree that it’s not good politically to appear to be in Wall Street’s pocket.

Where the two sides part ways: They don’t even agree on what happened 

The left believes that the financial crisis was a failure of the free market, and the problem was that banks had buffaloed the regulators into doing whatever they wanted. They believe that the banking system became unregulated and issuers had no qualms with issuing bonds backed by subprime liar loans. To them, the system collapsed once these derivatives blew up. To the left, the only fault that could possibly be laid at the feet of government was giving in to free market ideologues who pushed banking deregulation.

The right believes the financial crisis was due to a real estate bubble, which was fed by massive government subsidies, forcing lenders to make suspect loans in order to appease the CRA crowd and a profligate Federal Reserve that’s forced by its dual mandate to keep the pedal to the metal as long as inflation (solely as measured by the Consumer Price Index) is behaving. Finally, the right believe that booms and busts are part of capitalism and there’s no way to prevent them. They point to the increase in the homeownership rate as evidence of government activism.

The ultimate regulatory response will be of paramount importance to mortgage originators like Wells Fargo (WFC), J.P. Morgan (JPM), PennyMac (PMT), Stonegate (SGM), and even Redwood Trust (RWT).

Continue to Part 5

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