July 15, 2008 11:04

Don't regulate lending, regulate how lenders get paid

Among the most remarkable (I know, because I've already remarked upon it, and I'm not the only one) of the new rules on home mortgage lending finalized Monday by the Federal Reserve is the one that aims to:

Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value.

Lenders need the government to tell them not to make mortgage loans to people who can't pay them back? Actually, they probably won't for the next 10 or 15 years. But there will come a time when the bulk of bankers, mortgage brokers, mortgage securitizers and mortgage investors will have no memory of the Housing Debacle of '07 and '08 (and '09 and '10?), and somebody will need to rein them if a rerun is to be prevented.

Will the Fed rule actually do that? It sounds both breathtakingly obvious and dangerously vague, although it does subsequently get into specifics:

A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."

When I talked the other day to Louis Pizante, CEO of Mavent, "the mortgage industry's foremost provider of automated regulatory compliance solutions," and himself a former mortgage investment banker, he wondered if maybe the Fed wasn't taking the wrong approach. "The regulators are encroaching more and more on the actual underwriting of the loans and they’re getting more and more subjective in their requirements," he said--a recipe for confusion, legal wrangling, and poor compliance.

What Pizante would like to see instead are government rules on how mortgage brokers are paid. "To me it would seem that it would be much easier to regulate broker compensation," he said. For example: "You’re not going to get a lump-sum fee, you’re going to get a percentage of the cash flows from that loan."

There's been an awful lot of talk over the past year about changing compensation both on Wall Street and in the mortgage business to better reflect the risks inherent in transactions that deliver a big up-front payday. But the standard retort is that any firm that tries to enforce such pay arrangements would quickly lose its best producers to competitors. Which, in Pizante's view, is exactly why government needs to step in.

"That’s where regulation is supposed to come in," he says. "You don’t want to stifle innovation, but you do want to insure that there’s a level playing field."

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July 15, 2008 12:06

Taste test: Starbucks edition

Fannie who? Freddie what? I'm on va-ca-tion.

The only potentially work-related thing I did today was try the new we-can-do-healthy-too drinks that launch tomorrow at Starbucks.

The Vivanno--in orange mango banana and banana chocolate--is a $3.95 smoothie made with a whole banana, whey protein and fiber powder, and then some combination of milk, ice, cocoa and juice. I had my mom and niece taste it:

My mom's take on the organge mango banana: "It basically tastes like fresh banana. I don't taste any other flavors in it. But it's very thick and smooth." My niece: "It's a lot of banana, but that's not a bad thing. It's not too sugary. Keep it coming."

My mom also liked the chocolate banana variety (this time bittersweet chocolate was the overriding flavor), and considered 270 calories "not bad." My niece somehow doesn't like chocolate. I don't have words for that either.

We next tried the new $2.95 Sorbetto drinks that are only getting sold in southern California:

These are icy-like and come in two varieties: a Pinkberry-inspired yogurt flavor and one that is marketed as citrus but pretty much just tastes like grapefruit. My mom and niece were actually a lot more excited about these, which makes me wonder if Starbucks went national with the wrong product. Not that I know anything about market research.

But I do know that the Sorbetto was dispensed from a machine (super-simple from an operations point of view), and the Vivanno was made in a blender from scratch. I asked how much time it takes to make a Vivanno--I am constantly reminded that one of the problems at Starbucks is customers having to wait in line to get a simple cup of coffee. The Starbucks people assured me that a Vivanno takes about the same amount of time to make as a Frappuccino. The idea, it seems, is that clerks peel bananas in their downtime.

I hope it work out for Starbucks. They could use a little good news.

Barbara!

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