Regulatory Insight

The failure of Fannie Mae and Freddie Mac was called the biggest regulatory blunder of all time. Meanwhile, calls for greater mortgage regulation are growing, and a dozen institutions have already faced new regulatory orders this month.

In an annual letter to shareholders, JPMorgan Chase & Co. Chairman Jamie Dimon called last year’s collapse of Fannie and Freddie “perhaps the largest regulatory failure of all time.” He said that the government sponsored enterprises saw extraordinary growth — becoming larger than Federal Reserve and putting them beyond the reach of their own regulator.

“A situation was allowed to exist where the very fundamental premise of their credit was implicit, not explicit,” Dimon explained. “This should never happen again. Their collapse caused damage to the mortgage markets and the financial system.

“And, had the Treasury not stepped in, it would have caused damage to the credit of the United States itself.”

Treasury Secretary Timothy Geithner said in written testimony Tuesday before the Congressional Oversight Panel that a financial recovery cannot be accomplished without bringing the regulatory and market infrastructure up to date. He noted that financial activity gravitates toward the least regulated parts of the system and called for a more rigid regulatory regime for massive, systemic companies.

“It is not enough to address the potential insolvency of individual institutions,” Geithner stated. “We must also ensure the stability of the system itself.”

Dimon, in his shareholder letter, said that a systemic regulator must be able to anticipate risk and have the power to do something about it.

Mortgage Bankers Association Chairman David G. Kittle testified today before the House Financial Services Committee at a hearing on H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009, according to the trade group. He said the legislation lacks a national standard and instead relies on a patchwork of state and local laws.

JPMorgan’s Dimon echoed that sentiment in his letter, noting that the existing regulatory system is fragmented, overly complex and filled with too many regulatory gaps. He call for regulation of the entire mortgage business.

Kittle warned about the limited definition of “qualified mortgage” and said it would increase costs on many safe mortgage programs. He said a requirement that lenders retain at least five percent of the credit risk on non-qualified mortgages would be especially harmful to non-depository lenders that rely on warehouse lines-of-credit and don’t keep significant cash on hand.

“Lenders already have skin in the game by virtue of their representations and responsibilities to investors,” Kittle stated.

BankUnited, FSB, is nearing the end of the line, with the Office of Thrift Supervision issuing a Stipulation and Consent to Prompt Corrective Action Directive earlier this month, a filing with the Securities and Exchange Commissions said. The “critically undercapitalized” bank has until May 4 to either raise capital, find a buyer or liquidate.

The New York Branch of Doha Bank of Doha, Qatar, agreed to pay a $5 million civil money penalty over past violations of the Bank Secrecy Act, the Financial Crimes Enforcement Network and Office of the Comptroller of the Currency announced Tuesday. A review of bank transactions between 2004 and 2007 — as required by a 2006 cease-and-desist order — revealed that inadequate policies and procedures were in place.

The Federal Reserve Board announced formal agreements with the following institutions. The agreements generally require banks to conserve capital, enhance operations and reduce risk as well as report back on their progress.