Dodd-Frank: the Dangerous Flaw -- AEI's Latest Financial Services Outlook

In the latest AEI Financial Services Outlook, AEI scholar Peter Wallison, who served as a member of the Financial Crisis Inquiry Commission, explains that we are beginning to see the outlines of the housing finance system envisaged by the new Dodd-Frank Act (DFA).

In particular, Wallison warns that should the risk-retention requirements of DFA be adopted substantially as written -- and if there are no changes in the other provisions the act has added to the laws governing mortgage lending -- the housing finance system of the future will place immense financial risks and regulatory costs on mortgage originators (lenders) and on the securitizers.

These flawed requirements will fail to prevent the growth of subprime and other low-quality lending, virtually ensure the continued existence of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, impair the development of a robust private-sector housing finance system in the United States, and provide insurmountable advantages for the largest banks in the limited private securitization system that might exist.

Among the key points:

  • The key flaw in the Dodd-Frank Act (DFA) is its effort to control the quality of mortgages by imposing regulation and regulatory costs on lenders and securitizers.
  • Because it focuses on only a narrow part of the mortgage market, and exempts the government-backed sectors, the act will do nothing to prevent the deterioration in mortgage underwriting standards.
  • The fundamental flaws in the housing finance provisions of the DFA cannot be repaired by regulation; they should be repealed.
  • A plan developed at AEI would define a "prime mortgage" by statute, making it possible to eliminate the qualified mortgage, the qualified residential mortgage, and the 5 percent risk retention.

Peter Wallison is available for interview and can be reached at pwallison@aei.org or through his assistant at steffanie.hawkins@aei.org (202.419.5212). For all other media inquiries, please contact Hampton Foushee at hampton.foushee@aei.org (202.862.5806).

AEI's in-house ReadyCam TV studio may be booked by calling VideoLink at 617.340.4300. For radio interviews, please e-mail hampton.foushee@aei.org to reserve AEI's ISDN facilities.


Also Visit
AEIdeas Blog The American Magazine

What's new on AEI

image The Census Bureau and Obamacare: Dumb decision? Yes. Conspiracy? No.
image A 'three-state solution' for Middle East peace
image Give the CBO long-range tools
image The coming collapse of India's communists
AEI on Facebook
Events Calendar
  • 14
    MON
  • 15
    TUE
  • 16
    WED
  • 17
    THU
  • 18
    FRI
Wednesday, April 16, 2014 | 10:00 a.m. – 11:00 a.m.
Calling treason by its name: A conversation with Liam Fox

Join us at AEI as the Right Honorable Liam Fox sits down with Marc Thiessen to discuss and debate whether America’s intelligence agencies have infringed on the personal privacy of US citizens.

Thursday, April 17, 2014 | 4:00 p.m. – 5:00 p.m.
The curmudgeon's guide to getting ahead

How can young people succeed in workplaces dominated by curmudgeons who are judging their every move? At this AEI book event, bestselling author and social scientist Charles Murray will offer indispensable advice for navigating the workplace, getting ahead, and living a fulfilling life.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.