Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market

By Daniel Immergluck

Over the last two years, the United States has observed, with some horror, the explosion and collapse of entire segments of the housing market, especially those driven by subprime and alternative or "exotic" home mortgage lending. The unfortunately timely Foreclosed explains the rise of high-risk lending and why these newer types of loans—and their associated regulatory infrastructure—failed in substantial ways. Dan Immergluck narrates the boom in subprime and exotic loans, recounting how financial innovations and deregulation facilitated excessive risk-taking, and how these loans have harmed different populations and communities.

Immergluck, who has been working, researching, and writing on issues tied to housing finance and neighborhood change for almost twenty years, has an intimate knowledge of the promotion of homeownership and the history of mortgages in the United States. The changes to the mortgage market over the past fifteen years—including the securitization of mortgages and the failure of regulators to maintain control over a much riskier array of mortgage products—led, he finds, inexorably to the current crisis.

After describing the development of generally stable and risk-limiting mortgage markets throughout much of the twentieth century, Foreclosed details how federal policy-makers failed to regulate the new high-risk lending markets that arose in the late 1990s and early 2000s. The book also examines federal, state, and local efforts to deal with the mortgage and foreclosure crisis of 2007 and 2008. Immergluck draws upon his wealth of experience to provide an overarching set of principles and a detailed set of policy recommendations for "righting the ship" of U.S. housing finance in ways that will promote affordable yet sustainable homeownership as an option for a broad set of households and communities.

• Language: English
• Publisher: Cornell University Press
• Release date: Jul 20, 2011
• ISBN: 9780801457586

Book preview

FORECLOSED

High-Risk Lending,

Deregulation,

and the Undermining

of America’s Mortgage Market

WITH A NEW PREFACE

Dan Immergluck

Cornell University Press

ITHACA AND LONDON

Contents

List of Figures

Preface to the Paperback Edition

Housing Finance, Ideology, and the Rise of High-Risk Mortgage Markets

1. U.S. Mortgage Market Development and Federal Policy to the Early 1990s

2. Mortgage Market Disparities and the Dual Regulatory System in the Twentieth Century

3. The High-Risk Revolution

4. Mortgage Market Breakdown: The Contributions of Transactional Failures, Conflicts of Interest, and Global Capital Surpluses

5. The Economic and Social Costs of High-Risk Mortgage Lending

6. High-Risk Lending and Public Policy, 1995–2008

Policies for Fair, Affordable, and Sustainable Mortgage Markets

References

Figures

1.1 Holders of mortgage debt in the United States, 1892

1.2 Number of building and loans in the United States, 1888–1937

1.3 Total assets of building and loans in the United States, 1888–1937

1.4 Cash flows in a CMO securitization

1.5 Typical subprime CMO tranche structure

1.6 Outstanding home loans by funding source, 1952–1995

2.1 Origination market shares of by lender type, 1970–1996

3.1 Refinancing and home purchase loans by subprime lenders, 1993–2004, United States

3.2 Share of first-lien high-rate home purchase and refinance loans that were home purchase

3.3 Rates of growth in subprime refinance lending by race of borrower, 1993–1998, United States

3.4 Share of subprime loans that are no– or low-documentation

3.5 Increase in mean debt-to-income ratios for subprime home purchase loans

3.6 The historical progression of low and zero down-payment programs

3.7 The virtuous cycle of high-risk lending and housing prices

3.8 Issuance of mortgage-backed securities in the Alt-A, subprime, and GSE markets

3.9 Highly structured mortgage finance: the organization of collateralized debt obligations

4.1 Key transactional failures and perverse incentives in the origination and funding of securitized home loans

4.2 Five-year cumulative loss rates for CDOs vs. other security types for three below-AAA rating classes

4.3 Annual U.S. nonagency RMBS issuance and Moody’s stock price, 1999–2007

4.4 Growth of New Century Financial, 1996–2006

4.5 Early payment defaults for New Century loans, 2004 to early 2007

4.6 Percent of New Century mortgages that were stated-income loans

4.7 Percent of New Century loans that were 80/20s

5.1 Mortgage foreclosure rates, 1998–2008

5.2 Percent of subprime adjustable rate loans entering foreclosure, annualized rate, first quarter 2005

5.3 Percent of subprime adjustable rate loans entering foreclosure, annualized rate, first quarter 2007

5.4 Increases in foreclosures in the City of Chicago, 2005–2007

5.5 Percent of residential and business addresses vacant, 10-county Atlanta metropolitan area

Preface to the Paperback Edition

After I completed this book in 2008, the effects of the global financial crisis continued to spread and deepen. In the United States, the so-called Great Recession, which had been triggered by the subprime crisis, resulted in double-digit unemployment rates and fiscal trauma for thousands of state and local governments. The U.S. Treasury and the Federal Reserve began pumping trillions of dollars into the financial markets via the Troubled Asset Relief Program, the purchase of mortgage-backed securities issued by Fannie Mae and Freddie Mac, and a variety of other liquidity and financing tools.

By the summer of 2010, many of the highest-profile policy debates arising out of the financial crisis focused on the issues of systemic risk and too big to fail. Public discourse was preoccupied with reforming Wall Street and minimizing the likelihood of future taxpayer bailouts of financial firms. Scant attention was paid to the subprime foreclosure crisis and the need to secure a safer and fairer mortgage market. Moreover, much of the policy debate effectively cordoned off issues of consumer protection and fair and responsible lending as if they had little to do with systemic risk. Yet excessively risky financial markets are symbiotic with lax mortgage regulation. Risk-loving capital markets fed the mortgage system, whetting voracious appetites among investment banks and other purchasers of subprime and other high-risk loans. Mortgage originators and brokers were rewarded for making subprime loans and even (indirectly) encouraged to engage in fraudulent or near-fraudulent activity. At the same time, lax regulation at the point of origination meant that subprime and exotic mortgages became the favored building blocks for a wide set of engineered investment products in an attempt to satiate Wall Street’s appetite for yield and volume. Of course, the U.S. single-family mortgage market was not the only place where global capital flowed during the boom years—commercial real estate and other debt markets thrived on easy credit—but it was among the most sought-after places.

As of late 2010, there is no general consensus among the public about the most important causes of skyrocketing foreclosures. Ideological foes of government intervention in markets have attempted, sometimes quite successfully it seems, to paint the original crisis as stemming largely from federal intervention in mortgage markets or from regulations designed to foster fair access to credit rather than from too little, or weakly enforced, regulation. These seriously flawed narratives have been remarkably persistent, at least in some quarters.

My hope in writing this book was to help readers understand the key forces responsible for producing a mortgage market that was so vulnerable to collapse. To do so it was essential to provide historically and empirically grounded analysis that went beyond the presentist commentary then dominating much of the general news coverage. Historical perspective was crucial because, as I argue in the book, the subprime foreclosure crisis was largely the result of a shift from a predominantly risk-limited mortgage marketplace to a risk-loving one—a shift that began in the early 1980s, gained steam in the mid-1990s, and then progressed rapidly in the first decade of the new millennium. As I demonstrate in the main body of the book, these structural shifts were directly supported—and sometimes initiated—by policymakers in Washington and led to an increasingly fragile housing finance system. When this fragile system interacted with global financial imbalances and higher levels of leverage among dominant financial institutions, it reached its breaking point. Once defaults were no longer being suppressed by unsustainable price appreciation in some large housing markets, foreclosures increased, putting even more downward pressure on home values, and a virtuous cycle of subprime lending and housing price growth reversed quickly into a vicious cycle of foreclosures, tightened lending standards, and declining values.

The structural changes in mortgage and broader financial markets and the growth of the financial sector prompted politicians and lobbyists to push for even further deregulation. Government support also increased for the shadow financial system—a system of nontraditional financial institutions and products that developed largely absent a regulatory umbrella. Deregulationist policies in this arena reflected a broader shift toward neoliberal ideology, but the increasingly dominant role of unfettered capital markets in the mortgage market was also related to the broader financialization of the U.S. economy (Stiglitz 2010). The share of U.S. GDP accruing from the financial services sector grew steadily from just over 3 percent in 1980 to almost 6 percent by 2007 (Financial Crisis Inquiry Commission 2010). More specifically, from 1980 to 2007, the number of security broker-dealers—key actors in highly structured, private-label mortgage securitizations—grew at a rate ten times that of the remaining economy (Shin 2009).

The growing political power of the financial sector, in turn, led to further deregulation and pro-financialization policies (Gotham 2009). During the 2008 federal election cycle, for example, the financial services lobbies contributed an estimated $475 million to political action committees and individual candidates, far more than any other industrial sector, including health care, at $167 million, and the farm lobbies, at $65 million (Drum 2010).

The Failure to Learn from the First Subprime Crisis

Some accounts of the subprime crisis leave the impression that the problems of subprime and high-risk lending came as a total surprise to policy-makers in 2007. This is not true. Problems in the subprime market are well documented dating back at least to the mid-1990s. During the first subprime boom, which had begun in earnest by 1995, high-risk lenders exploited the lack of responsible home equity- and refinance-lending in minority neighborhoods and the broader geographies of financial and social disadvantage. By the end of the decade, subprime lenders dominated the refinance market in black neighborhoods across the country. Refinance borrowers in upper-income black census tracts were far more likely than borrowers in upper-income white tracts to receive subprime loans. Even in this first subprime boom, the dominance of subprime loans in minority neighborhoods produced large increases in geographically concentrated foreclosures (Bunce et al. 2001; National Training and Information Center 1999).

In retrospect, the first subprime boom registered as a minor blip in U.S. financial history. High default rates and market disruptions resulting from the 1997–1998 Asian and Russian financial crises caused a significant number of subprime lenders to fail, and others to cut back lending, in 1999 and 2000. The costs of this boom, however, were not felt heavily in the financial world and were largely borne by homeowners and their neighbors in minority and lower-income communities. The market had been largely successful in forecasting and containing expected high defaults within the fees and rates of subprime loans. Consequently, most lenders and investors managed to remain profitable despite sometimes very high default rates.

The second subprime boom began in 2002 fueled by dramatic growth in high-risk home purchase and refinance loans. Refinance loans would still account for a slight majority of all subprime loans as late as 2006, but subprime home purchase loans surged in the early 2000s. The explosion of subprime lending was followed by increases in exotic loans. In 2004, three types of exotic mortgages—interest-only, payment-option, and 40-year balloon loans—accounted for just 7 percent of the U.S. mortgage market, but by 2006, these three types had grown to 29 percent of the market (U.S. Department of Housing and Urban Development 2010).

The first federal policy action on subprime lending actually preceded the rapid growth of the subprime sector in the late 1990s. The 1994 Home Ownership and Equity Protection Act (HOEPA) required protections for borrowers when loans exceeded a specified high-cost interest rate or fee threshold, but only about 1 percent of mortgages exceeded this level (U.S. Department of Housing and Urban Development 2010). The law gave the Federal Reserve Board the authority to lower the threshold and to declare some practices on loans under the threshold unfair or deceptive, expanding the potential scope of the law. In 1999 the U.S. Department of Housing and Urban Development (HUD) and the U.S. Treasury Department created a task force which developed a substantial set of federal policy recommendations to address predatory mortgage lending, including calling on the Federal Reserve Board to use its authority under HOEPA to regulate subprime lending more vigorously (U.S. Department of the Treasury and U.S. Department of Housing and Urban Development 2000). The Board, however, was reluctant to strengthen the law and made only modest changes. It also declined to use its powers to regulate loans under the high-cost threshold.

In the early 2000s Congress introduced a number of bills aimed at increasing the regulation of subprime mortgages, but none of them was successful. In the face of federal inaction some states began to regulate high-risk lending. North Carolina adopted the first comprehensive anti-predatory-lending state legislation in 1999. The bill followed the threshold approach of HOEPA but set the triggers significantly lower so that the law would capture a larger portion of subprime loans. Within a few years, many states had passed predatory lending statutes restricting prepayment penalties, balloon payments, or other predatory practices or terms. The stronger versions of these laws significantly reduced mortgage default rates (Ding et al. 2010). However, during the peak of the second subprime boom in 2004, federal banking regulators preempted most state consumer protection regulations for federally chartered banks and thrifts and their subsidiaries.

As the second subprime boom surged after 2003, consumer advocates and researchers increasingly issued warnings about the dangers of subprime lending. The Woodstock Institute published a study in March 2004 showing that subprime lending was resulting in much higher foreclosure rates in neighborhoods where such loans were concentrated (Immergluck and Smith 2004). In the spring of 2006 the Consumer Federation of America issued a report warning of the dangers of exotic mortgages (Fishbein and Woodall 2006). At the end of 2006 the Center for Responsible Lending forecast that subprime foreclosures would accumulate to 2.2 million nationwide and that 19 percent of subprime loans would end in foreclosure (Schloemer et al. 2006). Though criticized at the time as alarmist, both predictions later proved to be too conservative. These warnings provoked almost no response from regulators and policymakers, but some hedge funds and other investors took note and began placing large bets against the performance of subprime mortgage-backed securities including those obtained via the credit default swap market (Lewis 2010).

The Federal Response: Foreclosure Mitigation and Financial Reform

From late 2006 through 2008, subprime foreclosures accelerated rapidly, especially in regions where foreclosures had been formerly dampened by rapid home price gains. Once price trends began to flatten, borrowers could no longer easily sell or refinance, and the vicious cycle of foreclosure leading to price declines, and price declines leading to more foreclosures, took hold. In early 2007, large subprime lenders including New Century Financial, one of the top three subprime originators, began to fail. Mortgage market investors began to pay serious attention when two Bear Stearns hedge funds failed and banks began their initial write-downs of their mortgage-related subprime investments.

The federal government’s response to the subprime foreclosure crisis can be divided roughly into two types. First were those efforts aimed at stanching the flow of foreclosures in the near term and addressing some of the negative effects of foreclosures on households and communities. Second were those efforts directed at strengthening regulation of the financial system in order to prevent future foreclosure crises.

As the financial crisis peaked in the fall of 2008 and the U.S. presidential election approached, foreclosures, housing policy, and mortgage regulation moved beyond the realm of policy networks to become front-page news and fodder for political talk radio. Given the public anger over the financial crisis, major reform of the financial system appeared inevitable. In September 2008, Republican presidential nominee John McCain, who had earlier described himself as fundamentally a deregulator, blamed the financial crisis on failed regulation, reckless management and a casino culture on Wall Street (Davis 2008; Kranish and Stockman 2008). Even Alan Greenspan, considered among the key champions of financial deregulation, admitted to Congress in October of 2008 that he had made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms (Irwin and Paley 2008).

The initial phases of the reduction and mitigation response, which are discussed in the book, include the industry-led but Treasury-Department-sanctioned Hope Now initiative, which involved outreach efforts to distressed borrowers. The Hope Now effort was less than successful in large part because lenders were reluctant to modify the principal balance on loans, and because the modified loans often resulted in higher loan payments as lenders attempted to recoup earlier missed payments (White 2009). The result was high default rates.

More forceful proposals to reduce foreclosures by allowing bankruptcy judges to modify mortgages met fierce industry and Bush administration opposition throughout much of 2008. Even after Barack Obama entered office in early 2009, renewed calls for bankruptcy modification received only lukewarm support from the executive branch. As the foreclosure crisis hit its apex in the spring of 2009, and after the banking sector had received hundreds of billions in TARP funds, FDIC guarantees of their debt, and other benefits, the financial industry lobbied effectively to defeat the bankruptcy cram down proposal, leading Senator Richard Durbin (D-IL), the assistant Senate majority leader, to comment that the banks were still the most powerful lobby on Capitol Hill. And they frankly own the place (Grim 2009).

Without the stick of the bankruptcy modification bill, the Obama administration relied chiefly on carrots—small incentive payments to servicers and borrowers—when it introduced its Home Affordable Modification Program (HAMP) in February 2009. The administration hoped that HAMP would result in more than three million permanent mortgage modifications. Although it was a more substantive and ambitious effort than the industry-led Hope Now alliance, HAMP took a very long time to generate any results. As of July 2010 HAMP had produced over 1.3 million initial modifications, but only 430,000 of these had moved past the trial period and become permanent (U.S. Department of the Treasury 2010a).

HAMP did not effectively address the problem of underwater borrowers, those whose homes were now worth less than their outstanding mortgage. Without realigning loan balances with property values, borrowers with severe negative equity had limited motivation to maintain ownership of their houses, especially if it meant defaulting on other debts or placing severe strains on household finances. Allowing bankruptcy judges to modify loan balances is an important component of any promising, large-scale loan modification effort. Without the threat of bankruptcy modification, servicers and investors have little incentive to make substantive and sustainable loan modifications in numbers large enough to affect foreclosure volumes. Moreover, as unemployment increased in 2009 and 2010, it became an important driver of foreclosures, and the portion of foreclosures that could be prevented via traditional modifications declined. With the passage of the Dodd-Frank financial regulatory reform bill in the summer of 2010, Congress allocated $1 billion to begin a modest mortgage-payment assistance program aimed at helping unemployed homeowners pay their mortgages. At this writing, it remains to be seen whether this measure is effective or is of sufficient magnitude to make a dent in ongoing foreclosure levels.

Financial Reform and Implications for Mortgage Markets

Despite what might have been perceived as favorable political headwinds for strengthening financial regulation, and despite Obama’s pledge during his election campaign to revamp regulations, the Obama administration’s strategy for regulatory reform was unclear early on. The appointments of New York Federal Reserve president Timothy Geithner as Treasury Secretary and former Clinton administration Treasury Secretary Lawrence Summers as Director of the National Economic Council gave those favoring stronger regulations cause for concern. Neither man was generally perceived as an advocate for vigorous regulation. At the same time, the administration appointed Michael Barr as Assistant Treasury Secretary for Financial Institutions in the Treasury Department. Barr had written extensively on consumers’ problems in financial markets and was seen as sympathetic to increased regulation. In the spring of 2009, the administration also established a new Office of Consumer Protection and appointed long-time consumer advocate Eric Stein, formerly the Senior Vice-President of the Center for Responsible Lending, as Deputy Assistant Secretary for Consumer Protection (U.S. Department of the Treasury 2010b).

In June 2009 the Treasury Department issued its plan for regulatory reform. The plan contained five key components: 1) increased regulation of institutions that pose systemic risk to the broader financial system; 2) improved market discipline and transparency; 3) establishment of a financial product safety commission and various other measures aimed at improving consumer protection and reducing risky lending; 4) new resolution powers so that distressed institutions could be wound down without posing systemic risks; and 5) increased international regulatory standards and coordination (U.S. Department of the Treasury 2009).

Perhaps the most contentious component of the Treasury Department’s plan was the creation of a consumer protection agency for financial products such as mortgages and credit cards—an idea first proposed by Elizabeth Warren (2007). The proposal called for consolidating regulation as well as supervising consumer lenders regardless of their charter type (U.S. Department of the Treasury 2009). The Consumer Financial Protection Agency (CFPA), as it was originally proposed, would be an independent agency with broad jurisdiction to collect data from financial institutions and conduct routine examinations of all lenders, ending some of the differences in enforcement that had been evident prior to the crisis. Nondepository financial institutions would be subject to routine supervision by a federal regulator for the first time. The plan would strip rule-making authority on mortgage and consumer finance regulations from the Federal Reserve, a significant step given the Federal Reserve’s tepid moves in this area under HOEPA. The plan proposed that the CFPA’s rules would act as a floor, not a ceiling vis-à-vis state regulations so that states would have the ability to adopt and enforce regulations that were stricter than the federal law. This proposal would end federal preemption in consumer finance, and for that reason it sparked heated resistance among industry groups. The plan also called for lenders to offer lower-risk, plain vanilla mortgage products, such as 30-year fixed-rate mortgages, when offering loans to potential borrows. Lenders would be required to offer such products prominently alongside other products.

The plan for regulatory reform also called for mortgage originators and issuers of mortgage-backed securities to have more skin in the game by retaining ownership of a modest but nontrivial proportion of mortgages they originate or fund. By calling for reduced leverage ratios for institutions issuing securities and higher fees on firms posing significant systemic risks, the plan was meant to reduce the appetite of investment banks and others for high-risk loans.

Some viewed the Obama administration plan for regulatory reform as too timid (Johnson and Kwak 2010; Stiglitz 2010). They objected to weak regulation of credit derivatives such as credit default swaps, very limited reform of the credit rating agency process, and failure to call for universal assignee liability in the mortgage market, in which purchasers or investors in loans or mortgage-backed securities assume liability for violations of regulations made in the origination of a loan.

But while some called for stronger reform than the plan proposed, industry groups as well as many in Congress claimed the plan was far too strong. The U.S. Chamber of Commerce and most of the financial services sector lobbied heavily against the CFPA. The Chamber launched a Stop the CFPA campaign, placing ads against the proposed agency in radio and print media (U.S. Chamber of Commerce 2010). Kevin Connor, co-director of the Public Accountability Initiative, estimated that approximately $600 million was spent on legislative and administrative lobbying by the six largest U.S. commercial and investment banks and the financial services trade associations during 2008 and 2009, even before the most intense phase of debate in 2010. Connor identified more than 240 lobbyists working for these large banks and financial services trade associations who had worked either for Congress or at a relevant federal agency. These included more than fifty former staffers of the House Financial Services Committee or the Senate Banking Committee or their members (Connor 2010).

Although many of the consumer protection provisions of the administration’s plan passed the House of Representatives in 2009, the House bill contained substantial compromises, including exempting credit unions and all but the largest banks from direct supervision by the CFPA, retaining significant levels of federal preemption of state regulations, and abandoning the promotion of plain vanilla loan products (U.S. House of Representatives 2009). The administration’s proposals faced even more difficulty—and moved more slowly—in the Senate, where key Democrats on the Senate Committee on Banking resisted many parts of the plan, including limited powers of federal preemption, the CFPA, and other provisions (Paletta 2010). Senate Banking Chair Christopher Dodd (D-CT) attempted to break negotiations into substantive components, with pairs of Democratic and Republican committee members negotiating each part. Dodd found little common ground on consumer protection with the ranking Republican member of the Committee, Richard Shelby (R-AL), but then began negotiating with Senator Robert Corker (R-TN). Corker not only rejected an independent CFPA but also rejected Dodd’s offer to put the agency within the Treasury Department and instead insisted on a Bureau of Consumer Protection within the Federal Reserve, which was already responsible for writing consumer protection rules on mortgages and consumer loans but which had declined to take aggressive action after the first subprime crisis. Barney Frank (D-MA), chair of the House Financial Services Committee and key architect of the House bill, was clearly annoyed when he heard of the plan to transform the new agency into a division of the Federal Reserve, calling it almost a bad joke (Kaper 2010a). Even more important, the Dodd proposal would not cover all lenders, excluding a wide swath of nonbank financial institutions (Kaper 2010b).

The rhetoric of the debate over financial regulatory reform in 2009 and 2010, especially that around the CFPA, was reminiscent of debates over legislative and regulatory debates in the late 1990s and early 2000s in the aftermath of the first subprime crisis. Opponents of stronger consumer protections during those earlier battles argued that regulation would restrict access to credit and that proscriptive rules were not the proper role of government (see for example Litan 2003). This very same rhetoric was employed in the fight over the CFPA.

The highly organized and well-funded effort to defeat the CFPA revealed that lenders and other financial firms were relatively comfortable with the existing regulatory system and its political economy (Andrews 2010). A new, independent regulatory agency represented a substantial departure from systems in which regulatory capture was well entrenched. Opposition was particularly strong to the notion of moving the rulemaking process from the Federal Reserve to a new, unfamiliar entity. The Federal Reserve is an organization traditionally dominated by neoclassical economists with preferences for deregulation and unfettered markets. It is partially governed by lenders themselves, who elect the presidents of the local Federal Reserve banks; presidents contribute to Federal Reserve policy making and manage supervisory staff.

While the financial regulatory reform debate in the spring and summer of 2010 disappointed many by yielding concessions to the financial services industry, the final bill—the Dodd-Frank Wall Street Reform and Consumer Protection Act—has the potential to move mortgage markets toward less volatility and more responsible lending. It is likely that the act would have been significantly weaker if the Securities and Exchange Commission had not charged Goldman Sachs with fraud surrounding subprime mortgage securitization in April of 2010 (U.S. Securities and Exchange Commission 2010). The SEC charged that Goldman Sachs sold complex subprime mortgage-related securities to investors without disclosing that hedge funds involved in choosing the composition of the securities had placed bets on there being major problems in the subprime market. Thus, selection of the assets comprising the securities was partly directed by a party that stood to gain a great deal in the event that the value of subprime securities plummeted.

This high-profile move by the SEC, and similar investigations and enforcement actions around the same time, emboldened advocates of stronger regulation. For example, one amendment to the reform bill called for restructuring the credit rating process so that securities firms could no longer choose the rating agency to rate their securities, thereby addressing conflicts caused by the traditional issuer hires and pays model of selecting a rating agency. Although this measure was severely weakened before the bill’s final passage, the bill does call for possible reform of this process in the future. The final bill also included significant language calling for tighter rules ensuring that lenders confirm borrowers’ability to pay their mortgages and requiring greater public disclosure of data on mortgage pricing and terms.

At the same time, other measures to strengthen regulation or limit risk did not make it into the final legislation or were watered down. One of the most important compromises was on the issue of federal preemption of state consumer protection regulations. While the final bill did end preemption of state regulations for mortgage-company affiliates of banks and made it more difficult for federal regulators to issue blanket preemptions of entire bodies of state regulation, it generally retained the significant ability of regulatory agencies to preempt state laws for national banks. While a great deal of mortgage lending had occurred through affiliated mortgage companies, soon after the bill passed it became clear that banks were planning to reorganize their lending activity so that the banks themselves would originate the loans and therefore retain preemption advantages (Rehm 2010). Other significant compromises included the exemption of some lenders from supervision or regulation by the new consumer protection bureau and the ability of the other regulators, collectively, to veto the bureau’s rulemaking.

While consumer protection and regulatory reform advocates won some major gains in the Dodd-Frank Act, the 2009–2010 policy debate revealed that regulatory politics had not changed all that much since the early 2000s. The Senate Banking Committee and the House Financial Services Committee were still dominated by members with a keen eye toward the concerns of financial institutions. Even with the subprime crisis catalyzing the