The Hazard of Moral Hazard

Tue Jan 15, 2013 by on Florida Law News

Roy Oppenheim’s commentary was originally published on Yahoo Homes! and is being redistributed on South Florida Law Blog with their permission

Businessman walking tightropeThose who cannot learn from history are doomed to repeat it.

We already know that the banks haven’t learned from their mistakes. They can and often will engage in risky behavior given the opportunity.

So why do regulators and those who have the chance to do something about it continue to give banks the wiggle room? Wall Street’s business model is inherently flawed, which is why banks are continually getting hit with hefty fines.

Yet banking lobbyists continue to hold immense clout in shaping regulation that will have a lasting impact on housing for years to come.

The business pages have been littered with headlines lately suggesting that governments still treat the banks like E.F. Hutton. When they talk, regulators still listen; case in point, the Basel Committee on Banking Supervision easing up on certain liquidity requirements in the Basel III rule. There is a great deal of dense technical jargon that will quite frankly bore most of you but the takeaway is this — banks still get their way and will still be able to take as many risks as they want.

Back here in the States, new mortgage lending rules trotted out by the Consumer Financial Protection Bureau are supposed to curtail so-called “liar loans” by requiring a more vigorous income verification process.

Except that those new tougher standards will be eased in over the next few years rather implemented immediately, so for the meanwhile it is business as usual.

Again, this came at the suggestion of banking lobbyists, under the pretense of not disturbing our tenuous housing recovery.

In both cases, there is too much concern over protecting our economy, and not enough concern over ending risky and fraudulent behavior.

We are still waiting for Wall Street to get its comeuppance, and you have to wonder if it will ever come. I wouldn’t hold my breath.

Real estate has come so far since the bubble burst, but lest we forget there is still a long and perilous road back to prosperity.

Banks haven’t done anything to earn our trust; in fact they continue to be Banks Behaving Badly.

I fear there will never be a final Day of Reckoning, and everything will be permanently swept under the rug.

Banks dominated the independent foreclosure review process from the beginning, and when the process became too burdensome for them, they convinced the government to let them walk away.

And homeowners get stuck with a paltry $8.5 billion parting gift, and no guarantee that the practices that led to the reviews in the first place will cease.

Instead of teaching the banks “Don’t Do It Again,” we’ve given them carte blanche to go on their merry way. That is the ultimate moral hazard.

If you think the housing bubble won’t burst again, I say I sure hope so. But trust me the air in the bubble is starting to expand all over again.

Another housing crisis is looming again on the horizon, as long as Wall Street is allowed to maintain its size and influence.

If and when that crisis comes, sad to say I will be there once again to say… I told you so.

Real estate attorney Roy Oppenheim left Wall Street for Main Street, founding Oppenheim Law along with his wife in 1989 in Fort Lauderdale, Florida, and is vice president of Weston Title. He is also creator of the South Florida Law Blog, named the best business and technology blog by the South Florida Sun-Sentinel.

Foreclosure Defense Attorney Roy Oppenheim

Tags: a moral, bank, banking, basel ii, clout, economic history, hazards, immense, insurance, lobbyist, moral hazard, mortgage lender, mortgage lending rules, real estate bubble, socioeconomics, subprime crisis impact timeline, subprime mortgage crisis, the hazard