Under the Dodd-Frank financial-reform law, large nonbank firms may be declared systemically important because their failure will cause a systemic breakdown. In effect, this amounts to a government statement that these firms are too big to fail.

For any housing finance reform plan to be credible, it must do much more than wind down the GSEs. Because of the Dodd-Frank Act a number of formidable legal obstacles now exist that must be cleared away before a private securitization market will come back. If the administration is serious, its plan must address all these issues.

The Shadow Financial Regulatory Committee would like to correct the perception that subprime lending is responsible for the turbulence in financial and housing markets that has emerged in recent months and disagrees with calls for massive federal intervention into mortgage markets.

As a result of the high loan limits and the suppression of private securitization through the obstacles and disincentives listed below, approximately 90% of all originations and 99% of all securitizations are now government guaranteed. This is an ongoing liability for the taxpayers and an unhealthy fiscal position for the United States.

The Committee believes that the primary function of the CFPA should be to simplify and make more informative current disclosure requirements to ensure that consumers receive sufficient information about financial products to make informed decisions.

In order to overcome the subprime mortgage bust, we must help borrowers to become more competent and informed.

The financial crisis was caused not by Lehman’s failure but by a common shock to all financial institutions that were holding privately issued mortgage-backed securities based on subprime loans. The way to prevent future financial crises is to prevent future common shocks.

This statement is also available here as an Adobe PDF.

Statement No. 249For Information Contact:Charles W. Calomiris212-854-8748Robert A. Eisenbeis770-416-0047

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