Category Archives: Office Of Financial Research

The OFR Receives A Nominee & CFPB Director Appointed, FINALLY!

It took only 17 months for the Office of Financial Research (OFR) to get a leader nominated.  It makes one wonder how long it will take the OFR to start “preventing another financial crisis,” as the New York Times DealBook put it.  To borrow another term from the NYT, 17 months is, without a doubt, a “painfully slow” process to nominate a leader.

Richard Berner has been nominated for the leadership role at the OFR.  He will have to be approved by the Senate which might take a very long time, as evidenced by the Consumer Financial Protection Bureau (CFPB).. Republican Senate leadership is pushing to abolish the OFR much like they are looking to abolish the CFPB.

Mr. Berner has been called another “revolving-door” Washington-candidate because of his earlier work as the chief U.S. economist for Morgan Stanley. However, while at Morgan Stanley he argued for blanket refinancing of government-backed mortgages, which would have helped millions of homeowners. Economically speaking, that move would have acted as a strong stimulus to the economy because it would have lowered consumer mortgage bills, freeing up the largest budget item for millions of individuals. This move would have carried very little risk because these mortgages are already guaranteed by Fannie Mae and Freddie Mac, and they reduce the risk of loan default (and ultimate foreclosure). Remember, even though interest rates are at a record low, many have been unable to refinance either because they owe more than their houses are now worth or because their credit is tarnished.  Christopher Mayer, a professor of real estate finance and economics at Columbia University, estimated that the move would have saved consumers $75 billion a year in interest.  Mayer estimates that 54% of the benefits would probably go to homeowners with mortgages starting under $200,000. Mayer and many proponents viewed the program as the equivalent of a tax cut from a policy perspective, something that conservative groups would like the sound of. Also, Berner, in 2010, reported to Morgan Stanley that while the Home Affordable Modification Program (HAMP) had helped the economy, more was still needed. He wrote that write downs and forgiveness of principal would be extremely useful in repairing the U.S.’s dysfunctional housing and mortgage markets.

I’m sure Berner will have a difficult obstacle to overcome in the Senate. This is clear when Yale Professors1 and MIT professors2 did not want the job fearful of being unable to garner Senate approval or being viewed as “too radical.” Andrew Lo, stated that “bickering” is not strong enough of a word for what has created an incredible “chill on any kind of innovation in government.”

Compare his statement with the CFPB, who had various names floating around for its leadership even before the ink on Dodd-Frank dried.  Granted, due to partisan infighting, the new agency received its leader, Richard Cordray, only 4 days ago. And that was only due to Obama’s bold move of using his recess appointment power. Because for the last 6 months the House Republican minority refused to even allow a vote on the issue. 40 of the 46 Republican Senators vowed they would never approveany Consumer Financial Bureau director unless the agency was put under a five-member outside board, had its work checked periodically by bank examiners and had its budget approved by Congress rather than the Federal Reserve.”

The CFPB needed a leader and the Dodd-Frank Act required a director be nominated. Instead of discussing whether he is qualified or not, Republicans have made it clear they won’t nominate anyone until the agency is abolished or significantly de-fanged. Notably, Scott Brown, Republican from Massachusetts, voted for Cordray in a December election to consider him.  He stated to POLITICO that he “met with him. He seems qualified [and] I think he would have done a good job.” Remarkably, this Senator stated his vote was not tied to what the GOP wants but what his constituents need, “[m]y vote isn’t dictated on what the [GOP] caucus tries to do.”3

In fact, President Obama, after the nomination, in an Ohio high school announced:

The only reason Republicans in the Senate have blocked Richard is because they don’t agree with the law setting up the consumer watchdog. They want to weaken it. Well that makes no sense at all. Does anyone think the reason we got in such a financial mess was because of too much oversight? Of course not. We shouldn’t be weakening oversight and accountability. We should be strengthening it – especially when it comes to looking out for families like yours. Financial firms have armies of lobbyists in Washington looking out for their interests. It’s time someone fought for you, too.

It’s also important to point out that the President, on his way to the high school, stopped by the home of William and Endia Eason. This couple was scammed out of $80,000 by a mortgage broker who promised to make a few thousand dollars’ worth of repairs.  These are one of the types of frauds that the CFPB would be targeting. Partisan-based gridlock is not a excuse to let Americans like these suffer. Republican Majority House Leader, Boehner, would not seem to agree, though. In a press release following the nomination, he states, “[t]his position had not been filled for one reason: the agency it heads is bad for jobs and bad for the economy.”

Economically speaking, this is an invented point, as no data has been provided to show that. However, if it truly were a salient concern, Republicans, opposing the CFPB and the OFR, would do well to legislate laws to change the current statutory framework rather than legislate through nominations. Congress is only suppose to deny nominations if the nominee is not qualified for the job, not because they do not agree with the agency’s powers.

 

 

Notes:

1.See William Alden, For Wall Street Overseer, Progress Comes at a Crawl, NYTimes, (reporting that Andrew Lo called it a “golden opportunity,” but feared he would not get Senate approval).

2.See William Alden, For Wall Street Overseer, Progress Comes at a Crawl, NYTimes, (quoting Robert J. Schiller, the Yale economist who co-developed the widely used Standard & Poor’s/Case-Shiller Home Price Index: It did not seem like I could do it,” said Mr. Shiller, adding that he thought the Senate would view him as “too radical.”

3.Also note that  Freshman Sen. Scott Brown will most likely face the CFPB’s architect, Elizabeth Warren, in a tough election next year.