Banking Law

The American Banker recently ran an article (paid subscription required) that discussed one of those hare-brained legislative schemes that pop up in times of economic crisis and that lead us to conclude that when states rights advocates refer to states as "laboratories of democracy," they are referring to the laboratory of Doctor Frankenstein (pronounced "Frank-en-steen" for all you "Young Frankenstein" afficianados). This scheme involves the plans of four states, Illinois, Nevada, Missouri and Maryland, to enact legislation "that would prohibit or restrict appraisers from using distressed sales, such as those of foreclosed properties, as comparable sales when assessing the value of a home." The promoters of the legislation say that widespread foreclosures and short sales in those states have "distorted" the market, driving down the prices of houses generally, because the distressed sales are used as "comparables" by appraisers. As a result, homeowners can't exercise their "right" to refinance their homes from high interest rate mortgages to low interest rate mortgages. Obviously, you'd need a healthy hit of peyote before reading a state constitution closely enough to find that right enshrined therein, but we've become a society where the term "right" is loosely defined and peyote prevalent.

It's amusing that legislators who think nothing of "distorting the market" if that distortion curries favor with the average homeowner, a homeowner who might like the idea of the state government artificially propping up the value of his home, would likely blanche the color of Caspar if you proposed allowing banks who invested in commercial real estate loans to amortize their losses over an extended period of time, which, as regular readers recall, was a legislative proposal first included, then removed, in the small business lending bill passed last year by Congress. After all, there are a lot more homeowners than there are community bankers.

The critics make their case that such legislation will have deleterious effects:

• artificially inflated housing prices were the cause of the last bubble and there's no reason to think that they won't lead to another.
• Fannie, Freddie, and the FHA may very well refuse to accept appraisals written in those states (so, good luck encouraging more home lending).
• Appraisers would be violating federal appraisal standards.

Bill Uffleman, president of the Nevada Bankers' Association, asks: "Part of the problem in creating the false housing economy was shaky appraisals," Uffelman said, "and now we want to sanction a new round of shaky appraisals?" Yes, Bill, that's exactly what "we" want to do, if by "we" you mean some pinhead legislators who understand many laws, but apparently not the law of unintended consequences.