Chapter 7 Federal Regulations and Financial Institutions Related to the Mortgage Market © OnCourse Learning

Chapter 7 Learning Objectives  Understand how the federal government regulates mortgage lenders  Understand which agencies are responsible for which institutions, activities and markets and the basis for their authority in regulating the mortgage market  Understand the concept of systematic risk within the financial market. © OnCourse Learning 2

Overview of Systematic Risk  Within the financial markets systematic risk exists when a large share of the firms in the market face financial failure simultaneously  Systematic economic conditions affect all or most firms  E.g. widespread decline in housing values 3 © OnCourse Learning

What Do Financial Regulators Do?  Regulate types of financial institutions  The Fed and the FDIC regulate commercial banks with federal charters  FDIC regulates state chartered banks (may or may not be regulated by the Fed)  The Federal Housing Finance Authority (FHFA) regulates government sponsored enterprises (GSEs) 4 © OnCourse Learning

What Do Financial Regulators Do?  Regulate types of risk (systematic and nonsystematic)  The Financial Stability Oversight Council (FSOC) has the duty of preventing, as much as possible, systematic risk  Regulating systematic risk = requiring adequate capital  Regulation of institutions engaged in mortgage lending simplified by the Dodd-Frank Act, which eliminated some regulatory agencies 5 © OnCourse Learning

Federal Financial Regulators Related to Mortgages 6 © OnCourse Learning

The Basel Accords  An international framework for adequate capital guidelines promoted under the Bank of International Settlements (BIS)  The guidelines link the risk of assets to the capital requirements 7 © OnCourse Learning

The Basel Accords  Currently not mandated for US institutions  US regulators use a version of the Basel Accords and the provisions under the Dodd-Frank Act (DFA)  DFA has: Stricter guidelines for systematically significant firms Requires capital standards on consolidated basis for financial holding companies Requires making capital standards countercyclical – increasing (decreasing) standards in economic expansion (contraction) periods 8 © OnCourse Learning

Capital Standards for Federally Regulated Depositary Institutions 9 © OnCourse Learning

Banking Regulators  Commercial banks have two different types of charters  Federal (national banks)  State  CBs are federally insured and fall under FDIC supervision  Primary regulators:  Federal banks: The Office of the Comptroller of the Currency (OCC)  State chartered banks: The Fed.  Credit unions: National Credit Union Administration (NCUA) 10 © OnCourse Learning

Banking Regulators  Concerned with the quality of the loans made by regulated institutions  Default risk  Interest rate risk  Maturity mismatch  If regulators find that an institution is exposed to excessive risk, they can order sale of risky loans and take steps to correct risky balance sheets 11 © OnCourse Learning

Office of the Comptroller of the Currency (OCC)  Established in 1863 as a part of the Department of Treasury  Supervises federally chartered banks  Failure to respond to OCC’s concerns may result in a suspension of a bank’s national charter. 12 © OnCourse Learning

Office of the Comptroller of the Currency (OCC)  Primary regulator for federally chartered thrifts  Has a primary interest in the national mortgage market  The Code of Federal Regulations (CFR) ascertains the real estate-related regulations applicable to OCC and other regulators 13 © OnCourse Learning

Federal Deposit Insurance Corporation  Created in 1933  Provides deposit insurance to lending institutions  Deposits are insured up to $250,000  Since 2008 insures unsecured debt of banks, thrifts and certain holding companies and business accounts, regardless of dollar amounts.  Manages the insurance fund, supervises financial institutions, and manages failed institutions  Primary regulator of state chartered banks (non-members of the Fed) and all state-chartered thrifts 14 © OnCourse Learning

The Federal Reserve System  Established in 1913  Charged with providing stability to the banking sector through managing bank reserves  Has authority to regulate the safety and soundness of member banks  Primary regulator of systematically significant (too big to fail) financial institutions 15 © OnCourse Learning

National Credit Union Administration  Established by the Federal Credit Union Act in 1934  Since 1970 regulates federal credit unions and the state credit union that elect federal deposit insurance  Administers National Credit Union State Insurance Fund to insure the deposits of member institutions  Has the authority to enact administrative orders regarding persons employed by the credit unions 16 © OnCourse Learning

Bureau of Consumer Financial Protection (BCFP)  An independent agency within the Fed, created by the Dodd-Frank Act  Create protection for consumer loans including residential mortgages  Oversees consumer-related financial transactions including deposits, mortgages, credit cards, debt collections, real estate settlement procedures and financial data processing  Enforces consumer protection laws 17 © OnCourse Learning

Federal Financial Institutions Examinations Council (FFIEC)  Established in 1979 to coordinate federal regulation of lending institutions  Charged with making regulations uniform and harmonious  Coordinates regulation among the states 18 © OnCourse Learning

Regulation of Mortgage and Derivative Securities  The Fixed Income Clearing Corporation (FICC) clears trades of MBSs and derivatives under the direction of the CME Clearing House (CMECH)  The MBS Division (MBSD) of the FICC provides automated trading, trade confirmation, risk management, and pool notification to the market  The US SEC regulates MBSD 19 © OnCourse Learning

Regulation of Mortgage Loan Originators  Agency problems in the relationship between mortgage loan originators (MLOs) and the secondary mortgage market  Originators have the incentive to originate as many loans as possible.  By selling loans to the secondary market – little regard for safety of the loans 20 © OnCourse Learning

Regulation of Mortgage Loan Originators  The S.A.F.E. Act (Secure and Fair Enforcement for Mortgage Licensing Act) of 2008  Established federal registration requirements for individuals that act as residential MLOs  Employed by institutions, regulated by federal regulations  All MLOs required to register with the National Mortgage and Licensing System and Registry 21 © OnCourse Learning