July 16, 2010 9:35 AM
We applaud Congress for passing comprehensive financial services reform legislation. While the legislation is imperfect in the view of most proponents and opponents, until now there has been no new measure in place that would preclude another massive financial meltdown that could have caused another Great Depression. That alone is a significant step forward. It is far better than relying on the memory spans of the small number of senior corporate leaders whose decisions caused the meltdown from preventing its recurrence.
The outcome clearly reaffirms the analogy of the Congressional legislative process to the making of sausage. In the view of many, the legislation does not address all the problem areas. In the view of others much of it is unnecessary and/or harmful. There is probably some truth in both views. Clearly the legislation's effectiveness in many areas will depend on the process of developing the numerous implementing regulations, where the outcomes in each case can range from strong and effective new rules to unintended consequences, and/or a waste of everyone's time.
Based on the history of major reforms, we will probably see some of all three. The legislation will also be revisited many times both to address loopholes and overkill. Both lie in the eyes of the beholders, and will certainly be influenced public opinion regarding financial services sector practices after the regulations have been implemented. Nevertheless there is today less likelihood of a future financial services meltdown than there was yesterday. For that we should be grateful, and thank the sausage makers for all the time and effort they put into the process.
July 7, 2010 3:08 PM
The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, is urging both to avoid participating in the Property Assessed Clean Energy (PACE) program. PACE lets homeowners borrow money from their local governments to finance the high upfront costs of energy-efficient upgrades. Local governments raise the money through the sale municipal bonds, and the homeowner's debt is secured by a lien on the home that is paid off first, before mortgage debt, in case of a foreclosure or bankruptcy. This development is unfortunate because PACE helps both homeowners and lenders. To the extent that home energy costs are reduced, homeowners have more money remaining to pay their mortgage. That in turn reduces the likelihood that homeowners will default on their mortgage payments.
Nevertheless, the Federal Housing Finance Agency has a point. Sometimes hoped-for energy savings don't fully materialize. Unfortunately some energy saving investments, such as solar panels, return far less in energy savings per dollar of investment compared to other alternatives, such as adding insulation to older homes that have little or none. It is understandable that the FHFA would not want to subrogate its mortgages to other debts, when many of those energy saving alternatives will leave the homeowner with less money for their mortgage after they have paid their PACE special tax assessment.
Nevertheless the PACE program is good for homeowners, the environment and the country. Over time, reduced energy demand could help reduce energy costs. We hope that Fannie and Freddie will work with the DOE and the White House to find a workable compromise that would minimize the impact on PACE programs that rely on the first-lien status. One alternative might be to tie the PACE program to actual energy savings in the home. For example, if the energy efficiency improvements actually save the homeowner $50/ month as documented by pre and post improvement records, the portion of the pace loan financed by that amount of savings could be made senior to the mortgage. From Fannie and Freddie's standpoint this would make the program neutral as far as increasing the risk of mortgage default. Many types of cost efficient home energy improvements would be totally covered by that rule. Others, such as solar panels, might not be today, but the homeowners would still benefit from federal tax credits for them (and in some cases state and/or local tax incentives as well). Hopefully, with President Obama's just-announced Department of Energy awards of nearly $2 billion in conditional commitments from the Recovery Act to two solar companies, the cost effectiveness of solar panels will also come down as the plants produce millions of state of the art solar panels each year.
June 8, 2010 12:23 PM
In a June 7 settlement with the Federal Trade Commission, Bank of America agreed to pay $108 million in refunds to hundreds of thousands of homeowners. Those homeowners who were charged excessive fees by Countrywide prior to its 2008 purchase by Bank of America. At its height Countrywide funded about 20% of all mortgages in the U.S. and serviced homeowners on 14 percent of all outstanding mortgages. Affected homeowners were charged inflated fees for property inspections, lawn mowing and other services after they defaulted on their loans. The homeowners were not provided the option of performing any of those services themselves or shopping for more competitive prices in order to reduce their debt. Countrywide's practices were the equivalent of kicking a helpless person while they were on the ground.
According to FTC Chairman Jon Leibowitz, 200,000 homeowners who defaulted on mortgages serviced by Countrywide may receive refunds under the settlement. This was an appropriate settlement, and should discourage similar gouging by mortgage lenders and servicers in the future. Eligible homeowners will receive instructions on how to apply for the refunds in coming months. More information is available at
http://www.ftc.gov/countrywide.
May 17, 2010 2:35 PM
A section in an early version of the Senate's financial services reform bill would have imposed a fiduciary duty on all financial advisers. It has been replaced by language that would require a study to determine if the current standards are adequate. We believe that anyone providing individualized investment advice should bear a fiduciary duty toward their clients. As a result of the recent practices that brought on the current recession, many consumers no longer trust or respect companies in that sector. Restoring that trust is essential to a stable economy.
A fiduciary duty requirement is not that onerous. Real estate brokers owe a fiduciary duty toward their toward their clients, as do attorneys and many other professionals. It's not that complicated or hard to do, nor have fiduciary duty obligations resulted in excessive numbers of lawsuits or other serious problems in other sectors.
If a fiduciary duty standard were created, we doubt than many investment advisers would have any difficulty in adhering to that standard. The few that didn't would deserve the punishment that they would receive, and the existence of the standard combined with an occasional enforcement when necessary would greatly improve the image of the profession.
It's time for investment advisors who care about their clients and financial services executives who care about their reputation to join consumers on this issue and help get rid of investment advisors who don't.
May 15, 2010 6:58 AM
Up until a recent court decision it was assumed that the Federal Communications Commission had the necessary authority to make sure consumers had the right to access legal websites and use legal applications. The FCC has needed to use that power only rarely, and consumers have enjoyed the benefits of this "network neutrality". The recent court decision was that in fact Congress had never granted the FCC such authority. FCC Chairman Genachowski has proposed an alternative approach, and has also promised that, if it is approved, the FCC will continue to use the same light regulatory hand that it has always used. Opponents of his proposal fear that it goes too far, creating the potential of regulations that could have detrimental side effects.
We believe that there must be a mutually acceptable middle ground somewhere in this debate. The telecoms all say they continue to support network neutrality, but are concerned that some future FCC may not adhere to its light regulatory approach. The companies claim that the Internet were to be heavily regulated, it could undermine continued private investment that is critical to achieve universal broadband availability. This is a credible argument - infrastructure investment in this sector continues to be impressive despite middling profit levels, and continued federal budget realities are such that universal broadband availability will not be achieved anytime soon without that investment. With these factors in mind it would seem that there must be some formula that would give the FCC just enough authority to protect maintain network neutrality should some company violate Network Neutrality principles in the future, but not so much authority that investors or consumers need fear that private sector investment might be threatened by a heavy-handed regulatory approach by a future FCC.
