How to Regulate an Industry to Death by Chris Jones

by 26 Oct 2011
Hopefully common sense will prevail. Imagine for a moment you are a businessman.  I know, but go with me here.  You have a small crop of beans that you want to sell at a local market.  You set off toward it, but as you go a fellow in a blue uniform with a nightstick stops you and measures the wheels on your cart.  He finds that your cart wheels are too wide, and you must narrow them.  So you stop and change the wheels. Off you go again, when another blue-suited fellow stops you and asks to examine your paperwork for your beans.  “I do not have any,” you say.  You just picked them and put them in the cart.  “How can we know what sort of beans they are?” he asks, and orders you to go back home, get the seed packets and the growing instructions and the manifest from the lot of seeds you ordered, plus fill in a form he gives you, the names of the manufacturers of your hoe and your spade, and the make and model of tractor you used to plow the field.  Because you are an agreeable sort, you do this. Off you go again.  This time a lady in a snappy business suit stops you and asks for your insurance for the cart and for the crop.   “Insurance for the crop?”  “Sure,” she says.  “What happens if someone gets sick from eating your beans?”   So you buy insurance. When you get to town, you find that although there are empty stalls for you to use to sell your product, the town officials mandate that you have to pay a fee to use them.  The fee is large.  Capping that, the officials want to make sure you are not making too much money, so they make you provide your cost estimates and they themselves set your prices.  You can get around this by partnering with one of the large bean-selling conglomerates if you want, but they also set how much you can make, and it’s even less than you could earn by yourself. Your beans have to be washed a certain way, packaged a certain way, and sold a certain way.  Your signage has to be only so large and have a huge amount of information on it.  You cannot sell to certain individuals, and you must sell to others, even if they can not pay you. At some point, aren’t you going to wonder if it’s worth it? Yes, my friends, yes you are.  And that, right there, is why 75-80 percent of the loan officers that were in the business five years ago are not in it now. You might think that the above represents an oversimplification of the issue, but I would contend that it does not.  Regulation and taxation are fairly simple instruments of public policy, and there is not as much difference between beans and mortgages as you might think.  There is a fundamental opposition between business and government that cannot be resolved easily.  On the one hand you have politicians, who measure their success by the votes that they receive.  For them to receive votes, what they need is positive outcomes.  People do not vote based on intention; they vote on results. But businessmen primarily need opportunity.  The results are important, but businessmen are willing to risk the results and do the work necessary to earn them.  What they need – what we need – is a chance.  We need low costs for entry, simple and fairly static rules, and the right to the fruits of our labor, be it tiny or immense.  Given those things, business flourishes. Unfortunately, when politicians receive bad results from their policies, they never … ever … take the blame on themselves.  They always blame businessmen, and introduce more regulation to correct the “problem.”  This is sort of like performing brain surgery with mittens on.  You might, true, be able to remove the clot that was causing the coma, but in so doing you are extremely likely to scatter woolly fuzz all over the place and make new problems that were worse than the one you solved.  That is all government can do, though.  It simply does not have tools precise enough to create the results – but ONLY the results – that it wants. HVCC, HMDA, HERA, etc. are all attempts to correct problems that really existed, and in some cases still exist.  Unfortunately, most of these rules and regulations either did not address the real problem in the first place (quiz:  did incidence of appraisal fraud go up or down in the years since HVCC?), or addressed it but created new and more complex problems that harmed the people that were supposed to be protected and helped (another quiz: did closing costs rise or fall during the “simplification” of the application process over the years 2007-2010?). The bad news is that Richard Cordray, or whoever ends up at the top at the brand-new Consumer Financial Protection Bureau will be a great believer in brain surgery, and their mittens are ready.  Moreover, they will have been hired for the job because of their willingness to use regulation as a whip, as we have already seen over and over from the Fed, FHA, HUD, and every other regulatory agency and department.  Political pressure to crack down on the mortgage industry is not being observably relieved by the blizzard of regulations already in place.  I grew up in politics.  My first job was on Capitol Hill, and my first boss was Mitch Daniels, who is now the Governor of Indiana.  One of my first assignments was to perform research on a fellow from Delaware named Joe Biden.  You might have heard of him.  My experience is that regulation practically always increases.  The incentives are very strong for government to produce ever-greater volumes of rules, as proof that they are “doing something.”  That “something” can and usually does have terrifically negative consequences for the businesses being regulated.  And it has for us.  It has for our clients, too, which is worse. There is, sort of, good news.  The good news is that breaking into the mortgage business is now quite complicated and difficult.  Individual licensing is increasingly time-consuming and complex.  Starting a new mortgage company is increasingly expensive.  Financial incentives for doing so are smaller than they have ever been.  All this combines to make it likely that our competition will be muted for a while, and will mostly come from existing players in the industry.  The pie is smaller, but the number of people with forks is smaller still. And the business is still worth it.  We still provide a necessary and valuable service to people that need help.  There are still ways to make a decent living at it.  Ultimately, too, there is the bare possibility that real regulatory reform will come about, and common sense will reduce and modify the rules that are slowly strangling the housing market. Don’t hold your breath.  But don’t stop planting beans, either. Chris Jones, branch manager with City 1st Mortgage Services, is a seven-year industry professional in brokering and banking, with a background in financial services, national politics and Main Street entrepreneurialism. Raised outside Washington, D.C., Jones lives in Lehi, Utah, with his wife, Jeanette, and their eight children. He blogs for and can be found at, or (801) 850-3781.


Should CFPB have more supervision over credit agencies?