“Taxpayers’ exposure to Fannie and Freddie, once an implicit guarantee, has now become an explicit obligation to cover its debts,” Ryan wrote in his budget plan. “The housing finance system of the future will allow private-market secondary lenders to freely and transparently compete, with the knowledge that they will ultimately bear appropriate risk for the loans they guarantee. Their viability and profitability will be determined, not by political favoritism, but by the soundness of their practices and the value of their services.”

Many in the industry feel a completely private system — one that hasn’t existed since Fannie was chartered in 1938 — would be unlikely to ever arrive.

Tom Cronin, managing director for financial adviser The Collingwood Group, said until reforms such as the qualified mortgage, risk retention and the new servicing standards are in place and more importantly understood, private capital would remain slow to return.
“I don’t think anything is in place for that to be a likely outcome anytime soon,” Cronin said in an interview. “Just because he (might be) vice president and just because his budget is being revisited, we’re still nowhere near an era of private capital to support housing finance. Absent some secular activity, there are no broad-based initiatives getting any spotlight.”

The only like-minded bill to move beyond a congressional subcommittee was the Private Mortgage Market Investment Act from Rep. Scott Garrett, R-N.J., which supported a completely private system similar to what Ryan proposed. A subcommittee Garrett chairs approved the bill in December. It has yet to be brought up before a full committee.

Even if Romney wins the election, Republicans would have to take a majority in the House and Senate to pass such a plan, which met opposition from not only Democrats but powerful industry interest groups as well.

Holding back GSE reform is a nonexistent private-label system and yet to be finalized rules under the Dodd-Frank Act. Romney has repeatedly said he would repeal the largest reform of Wall Street since the Great Depression. Even if Republicans take enough power to do this, what Romney has planned may not be so simple as a repeal.

Dodd-Frank Dilemma
Just days before the Jacksonville, Fla., debate, Romney took the stage again.
NBC News anchor Brian Williams swivels to him as the conversation turns toward the economic problems. “Was it too easy, did vehicles of the government, make it too easy to own a home in this country? Mr. Governor, to help these homeowners or not?”

“You have to get government out of the mess. It created the mess,” Romney answers. “You have to get more people get more flexibility from their banks. Right now with Dodd-Frank we made it harder for banks to renegotiate mortgages.”

Then comes the interesting part, especially from a private-equity guy. He hedges.

“It was poorly regulated. Markets have to have regulation to work. You can’t have everybody open a bank in their garage. You have to have regulation. But it has to be up to date. They didn’t have capital requirements put in place for the different asset classes banks had. They also didn’t have regulation properly put in place for mortgage lenders. Derivatives weren’t being regulated. You have to have regulation. They had old regulation. Burdensome. Then they pass Dodd-Frank, which … it has made it almost impossible for community banks. I was with the head of one of the big banks in New York. He said they have hundreds of lawyers working on Dodd-Frank to implement it. Community banks don’t have hundreds of lawyers. It’s just killing the residential home market, and it has to be replaced.”

Romney later talks about replacements with TIME Magazine. In a sit down for the issue, which published Sept. 3, Romney gets refreshingly specific. One of the most central parts of Dodd-Frank is the risk-retention rule. It requires lenders to maintain at least 5% of the credit risk after selling the loan off to the securitization market and eradicates the lend-to-distribute model. The rule is scheduled to be finalized in January, the same month Romney would take office.

The risk-retention rule may actually survive, though.

“Now, we do need to have regulation in the banking industry. Extensive regulation is appropriate in an industry that has such an impact on the overall economy,” Romney told TIME. “We have to look at what the causes were of the last crisis and take action to prevent those causes from reappearing. What kinds of things come to mind include capital requirements, levels of leverage, which are appropri ate and inappropriate, banks maintaining risk in assets, which they gather. Specifically, I’m referring to the idea (that) if a bank originates a loan or a mortgage that it should be on the hook for some portion of the loss if that loan or mortgage fails.”

The question is, though, how likely is it that Dodd-Frank can be repealed and all those “burdensome” regulations rolled back? He would need 60 votes in the Senate to get it done. According to RealClear Politics, the race for a Senate majority is a dead heat.

With a repeal of the law unlikely, a Romney administration will have to do it the old-fashioned way: gutting regulatory agencies designed to enforce the rules.

Ed Kramer used to be one of those regulatory officials, the New York state banking regulator, actually. But since 2006, he’s been an executive at the compliance firm Wolters Kluwer.

“It’s hard for me to believe it would happen,” Kramer says about a full repeal.

So without it, Kramer believes Romney may take a piecemeal approach. Target No. 1, he said, would be the Consumer Financial Protection Bureau.

“If he becomes president and even though the CFPB budget is a percentage of the Fed, you have the director sitting in there on a recess appointment. One of the first things he’s likely to do would be to put their people as head of the various regulatory agencies,” Kramer says.

To keep from upsetting the market too much, the qualified mortgage rule, the risk-retention rule Romney backs and the loan officer compensation guidelines would likely proceed as planned. The key part, though, will be examinations. A director under a Romney administration will be very different from the aggressive tactics CFPB Director Richard Cordray has already taken under Obama.

One mid-sized mortgage lender in the Midwest spent $1 million preparing and handling a CFPB examination, according to Kramer. This kind of cost will likely be a priority for a Romney appointee, and enforcement will likely take a backseat.

But even more glaring would be changes at the Justice Department. When President Obama tapped Eric Holder as the U.S. attorney general, Holder brought in arguably one of the most feared men in mortgage finance today. Thomas Perez. Perez leads a DOJ team that cracked down on lenders for charging minority borrowers more for mortgages than similarly situated white borrowers during the housing bubble.

Most recently, Wells Fargo had to pay roughly $175 million to homeowners and community groups around the country to settle claims its wholesale lending brokers allegedly charged black and Hispanic borrowers more for the same subprime mortgages whites took out.
There’s concern in Congress the DOJ may be too involved in these cases. The Justice Department and other regulators use disparate impact analysis to pursue Fair Housing Act crackdowns themselves, rather than pursuing a lender’s intent to discriminate.

Rental property owners sued St. Paul, Minn., recently for enforcing housing codes and cracking down on substandard living conditions, which the managers claimed cut down on affordability. Had St. Paul won its case from local the Supreme Court, the ruling would have defanged the government’s major Fair Housing Act claim when pursuing the banks.

A House subcommittee is investigating what Justice said to St. Paul officials before the city withdrew its defense against a housing discrimination case from the Supreme Court.

“We’ve not only seen much more enforcement from DOJ but much more aggressive enforcement in last couple of years,” Kramer says. “There may be other emphasis on what their priorities would be under the Romney administration.”

When asked if the industry should expect such a large diversion from what the Obama administration is doing, Kramer says for all the rhetoric, he hopes some of the new emphasis remains.

“I would like to think that if Mr. Romney becomes elected that he will maintain some level of consumer protection. I don’t think he would take it all out, certainly if wants to be elected for a second term. Would it be as much? Based on what he’s saying it’s likely not,” Kramer says.

Kramer remembers when he was a boy, he shared a room with his siblings. It was crowded and uncomfortable. But when he was 8, his parents had managed to save up a 20% down payment and moved into a large place in Connecticut. It sounds simple the way he puts it. He wonders how it all went wrong, but he doesn’t wonder how it will be going forward under Romney or Obama.

The industry under either one can’t be saved again.

“We can’t do it the way we did it the last time around, when we raised up the levels of affordable housing. Where you originate a junk loan and it goes into a private-label security and you take a bunch of those CDOs and put all these top ratings on them,” Kramer says. “My hope is that we’ve all learned a lesson to not allow that to happen again.”

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