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Here's what 848 pages of congressional wisdom has wrought

Policy Wonk
Rochester Business Journal
June 14, 2013

My wife and I are buying a house and getting a mortgage-the first time we've been up close and personal with the homebuying process in 22 years. What's different this time around is the Dodd-Frank Act, 848 pages of congressional wisdom aimed at protecting Americans from each other-and from ourselves.
Regulation is a necessary evil. The world isn't a fair place. Society (thus government) should protect the weak and the foolish from the strong and the clever. But there are two risks with regulation. First, there is a limit to government's power to protect the weak and the foolish. Second, the cure can be worse than the disease, even for the people it was intended to help.
Yes, the mortgage market was the Wild West before the financial meltdown, and predatory lending was one of the problems. Mortgage swindlers persuaded the credulous that they could buy mini-mansions with blue-collar wages. There will always be swindlers ready to prey on people who are weak at arithmetic. That's why lotteries are such good sources of revenue for governments.
If our experience is any guide, one way the Dodd-Frank Act aims to improve "transparency" is by increasing the number of required disclosure forms. The mortgage application itself now has countless forms to be signed, detailed legal declarations I read with interest and care before signing barely skimmed. I suppose I could have hired a lawyer to defend my interests, but I simply chose to sign. And sign. And sign.
And much like the software license agreements we blithely swear to have read, these signed but undigested disclosures don't help anyone. Caveat emptor-buyer beware-still applies. Regulation cannot wholly protect us from ourselves.
Dodd-Frank also has driven up the cost of compliance throughout the process. It has certainly thrown the fear of God into the lenders. We've gone from "liar's loans"-mortgages based on inflated, often fictional assets-to disclosure that is astonishingly intrusive. Tax returns must include every schedule. Brokerage statements-which are padded with company propaganda, market analyses and about two pages of real information-must be submitted with all 39 pages intact. If I'd had to print all of this-instead of, thankfully, uploading files-it would have run to hundreds of pages.
Appraisals are now handled by third-party "appraisal management companies," which ensures that the lenders and the appraisers don't conspire to hoodwink the borrowers. This growing industry, funded by fees paid by borrowers, engages appraisers for cut-rate fees, and I'm told they may be performing appraisals from afar, eyeballing only the transaction records, not the homes and neighborhoods.
Remember that the interests of the appraiser and the borrower are aligned; the lender doesn't want to hand over $250,000 to buy a house worth only $125,000. The problem isn't with the appraisal process. What we need to fix is the connection between the mortgage originator and the mortgage holder. We want to ensure that originators have a stake in the viability of the mortgage. Ties between the appraiser and the lender should be reinforced, not weakened.
Now, however, we've upended a longstanding part of the homebuying process to address what is, historically, a rare conspiracy between lender and appraiser to defraud homebuyers.
If my personal contact with Dodd-Frank's legislative overreach is representative, the impact of the entire act on the financial services industry will be vast and will continue to expand as agencies in Washington dutifully create regulations to enforce the law's general decrees. Jonathan Macey of Yale Law School wrote: "Laws classically provide people with rules. Dodd-Frank is not directed at people. It is an outline directed at bureaucrats, and it instructs them to make still more regulations and to create more bureaucracies."
I can't help but be reminded that staff members of the Internal Revenue Service, when assigned to approve applications for new 501(c)(4) "social welfare" organizations, imposed their own values on the law. Vague legislation empowers bureaucracies and distorts the balance of power between the legislative and executive branches of government.
A related topic: Naturally, the mortgage broker checked my credit score. That's not new to Dodd-Frank, of course.
I was shocked to hear the broker cluck over the phone, "Oh my, Mr. Gardner! Your wife's credit score is excellent. But yours is much lower."
What? Our marital finances have been wholly integrated for 35 years. Every asset (save IRAs) is jointly owned. Every loan has been joint. We file joint tax returns. We have joint credit cards, a joint checking account. By any objective standard, our finances are indistinguishable.
There's one exception, I suppose: My wife does not get paid for all the good things she does with her time. Thus one difference in our finances is that most of our cash income is attached to my job, although it would be unfair if my credit score were higher on this account. Yet it is her credit score that is 117 points higher.
A bit of digging by the mortgage broker revealed a medical charge (for my care, as it happens) that got lost in the shambles of my desk. When it went to collection, it got my attention and I paid up. All $51 of it.
Fortunately, this didn't affect the interest rate we got on a mortgage, but it might have.
So go to and check your credit score. You may be in for a surprise.

Kent Gardner is chief economist and chief research officer of the Center for Governmental Research Inc.

6/14/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email

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