The year 2008 will always be remembered as the year we elected Barack Obama, the first African-American president of the United States. The year will also be remembered as the year in which the United States and the world experienced the greatest economic meltdown since the Great Depression. The precipitous drop in the Dow Jones Industrial Average from 12,800 early in the year to about 8,500 at year’s end has caused a slowdown in business activity, and consumer confidence around the country, which has spread worldwide.
President-elect Obama and his economic advisors will have to develop a strategy early in the administration to deal with the effects of this economic downturn; and with the advisors and cabinet members he has already selected, I believe the new administration will effectively address this economic turmoil.
As Commissioner of the Department of Insurance, Securities and Banking (DISB), the chief regulator for the financial-services industry in the District of Columbia, I have been constantly asking myself and colleagues, “What caused the meltdown of the financial services companies that led to this economic downturn?” and “What new regulatory processes are needed to mitigate this economic downturn in the future?” Most experts believe all roads to understanding the reason for the meltdown begin with subprime mortgages. In most situations, these mortgages were given to consumers without determining whether the consumer had the ability to repay the loans.
As the agency responsible for regulating a majority of the mortgage lenders and brokers that provide mortgage loans in the District of Columbia, we attempted to address the problem of undocumented loans by allocating resources to educate and protect consumers from unscrupulous activities by these licensees. Starting in 2007, DISB intensified its examination of these entities, and initiated corrective action against any mortgage lender or broker that was determined to have inappropriately provided loans to our residents. DISB also committed to become part of the Nationwide Mortgage Licensing System, a new system developed by the states’ mortgage regulatory agencies to implement a national licensing and compliance database for all licensed individuals in the mortgage lending industry. Mortgage lenders and brokers affiliated with federally regulated banks are required to register with the national system; thereby ensuring that all entities that provide and service these loans nationwide will be included in the same database. This is a major step in the right direction to develop a comprehensive regulatory scheme for these entities.
DISB continues its work assisting consumers whose mortgages are in default and who are close to foreclosure. The agency conducted several neighborhood workshops where we provided our foreclosure mitigation plan that outlined several ways the District of Columbia and the federal governments can assist consumers in distress. One of the great benefits that arose from the workshops is the increase in the number of foreclosure- related complaints the department handled in 2008. The number of complaints increased to more than 100 in 2008 from approximately 20 complaints we received two years ago. It appears that our residents know that we can provide information and assistance when they have mortgage-related concerns. With the number of foreclosures in the District of Columbia reaching 1,000 in 2008 from less than 300 in 2007, we will continue to increase our presence in the District’s communities. Further, DISB will continue to work with sister District government agencies to see how we can channel our resources to best mitigate the losses for residents.
In 2009, DISB will continue to increase the effectiveness of its regulatory processes, increase the number of financial-service companies doing business in the District of Columbia, and continue to find effective strategies to educate our consumers on the benefits of financial-services products as long as these products are suitable to the needs of the consumer.
Finally, when looking to understand what caused this economic turmoil, it is hard to simply focus on mortgage lenders and brokers. With the low cost of funds from the Federal Reserve making credit readily available to businesses and consumers alike, it became commonplace for consumers to live beyond their ability to meet their obligations. From the family wanting a home larger than their neighbors, yet were unable to even afford a downpayment to the investment banker who gave little regard to loan quality when securitizing loans, and to all the players down the financial chain, everyone was looking for ways to sustain their life styles. So from my perspective, when I look at the true root cause of this economic downturn, I see “greed” as a driving force that motivated many of the players connected to the mortgage business. Let’s all hope for a better year in the financial markets in 2009.