[Congressional Record Volume 156, Number 14 (Monday, February 1, 2010)]
[Senate]
[Pages S387-S389]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




          UNINTENDED CONSEQUENCES OF WELL-INTENDED REGULATION

  Mr. ISAKSON. Mr. President, I rise tonight following on the heels of 
three more bank closings in my State last Friday; not new banks, one of 
them over 60 years old, one of them over 100 years old. I want to talk 
for a few minutes tonight about the unintended consequences of well-
intended regulation.
  We are now going into the 26th month of the current recession. This 
will arguably be the longest recession post-World War II America has 
experienced. I can tell you from having gone through four of the 
recessions post-1960, this is by far the worst of anything that we 
experienced. We are at a point where we have to make some good, solid 
decisions, but we have to help our economy, help our businesses, and 
help our financial institutions.

[[Page S388]]

  Don't get me wrong at the outset. I am not talking about waiving or 
dispensing or looking the other way. I am not talking about loosie-
goosie regulation which got us into the mess we are in: shoddy 
underwriting and poor credit. But what I am talking about are realistic 
approaches to difficult problems and looking to our past to understand 
the answers for our future.
  I wish to talk about rule 114, which is called mark to market. Mark 
to market is where an appraisal of an asset held by a bank is appraised 
at what it would sell for today, and in many cases because of a 
difficult real estate market, in both commercial and residential, those 
values are dramatically depressed, in most cases below the loan that is 
against them. So the asset deteriorates, the asset side of the balance 
sheet of the bank deteriorates, and you have difficult problems.
  In the late 1980s and early 1990s we had a similar period of time. We 
had something called the Resolution Trust Corporation, the RTC. It was 
kind of a bad bank that took all the assets of the failed savings and 
loans around the United States. We waived mark to market for 3 years. 
We had a 3-year moratorium so the banking institutions and their 
regulators could deal with loans in a practical, pragmatic way rather 
than Draconian, rigid application of mark to market.
  Second, we have to consider doing something on the appraisal rules 
that have been passed down. I have talked to our Secretary of HUD on 
this matter, and I intend to talk to him more about it. I was in 
Clayton County, GA, south of Atlanta, just 2 weeks ago, a county that 
has been hit hard by the housing recession, a county where values are 
42 percent below what they were in 2006. That is a significant decline.
  I talked to one realtor after another and one lender after another 
who told me the interesting thing that has happened. With the new 
appraisal regulations, the appraisals on these houses when they sell at 
a short sale or foreclosure are coming in at exceedingly low values. 
But when the people have to get their homeowners insurance to insure 
the house, they are having to insure the house for more than they paid 
for it. Why? Because you can buy houses in Georgia today or around the 
country for less than what it costs to replace them.
  When I entered the business in the 1960s, cost to replace was the 
principal way real estate was evaluated. Later, comparable sales took 
over cost to replace. I think it is time we look at cost to replace 
becoming the primary mechanism for establishing lending and insurance 
purposes.
  The short sale situation is another problem. It has taken banks in 
some cases 10 to 12 months to give somebody an answer on a short sale. 
A short sale, for those listening, is when you have a house and you are 
in default, you can't pay your loan but it is not in foreclosure yet, 
you find a buyer who can pay 80 cents on the dollar.
  Say you owe $100,000, and they can pay $80,000. You go to your bank 
and say: Will you take $80,000 and forgive the $20,000 and let me sell 
this property rather than foreclose it? Banks are reluctant to make 
decisions and most of the time, therefore, they didn't. Those houses 
they could have sold on a short sale go into foreclosure. When they go 
into foreclosure, more often than not they are vandalized. Their value 
declines 1, 2, 3 percent a month and the house comes out at an even 
lower value.
  To show you the value of some well-intended regulation, I want to 
commend the Treasury because last week the Treasury issued a ruling to 
banks that received TARP money that they must respond within 10 days on 
any short sale offer on a mortgage that bank holds. We are going to see 
a remarkable change in Denver, in Atlanta, in Houston, and a lot of 
other places. We are going to see some sales that have not been taking 
place start to take place. We are going to see some inventory 
reabsorbed. I commend the Treasury on their good approach to short 
sales.
  I wish to talk a minute about loss-share. The FDIC has come up with a 
loss-share proposal for the banks that take the troubled assets of 
banks that have failed. FDIC says: If you will take these assets, we 
will guarantee the most you can lose is 20 percent on the value. We 
will cover the other 80. But to make sure we do not get in worse 
trouble, you cannot extend credit beyond 10 percent of the debt owed to 
the borrower.
  The problem with that is a lot of these assets are, in fact, 
performing, but they have not been completed yet. To complete the asset 
so it begins to pay back, sometimes you have to extend credit beyond 10 
or 15 or 20 percent. To have an absolute rule that you cannot is 
causing loans to go bad or to go unfunded that otherwise should have 
been funded.
  In 1974, we went through a housing recession as deep and as 
problematic as the one today. Foreclosures were every bit as rampant--
maybe not as big in numbers but as rampant and as difficult. As is 
beginning to happen now, the commercial loans began to fail in 1975.
  An interesting thing happened around the country. Commercial lenders 
and the regulators recognized very quickly if they foreclosed on 
commercial loans like they had foreclosed on residential loans, the 
banking system would collapse; the asset side of almost all banks would 
collapse. So what they decided to do was encourage banks to work out 
these assets by going to the developer who was in trouble, who owed the 
money, and say: I'll tell you what. If you deed this property back to 
us in lieu of foreclosure and then let us hire you on an earned-out 
process so we can develop our way out of this debt rather than 
foreclose ourselves into a loss--and more often than not, probably 
three out of every four transactions, it happened.
  The house I live in today I built on a lot I bought in a subdivision 
that had been taken back by the C&S National Bank. They had hired the 
developer to do a workout. I bought it at a good price and later did 
most of the sales in the development. It became a great development, 
and the bank eventually was made whole. The bank would have lost lots 
of money if they had to take that thing and foreclose on it and had not 
worked it out.
  I encourage our regulators to give the great American ingenuity and 
entrepreneurship the chance to work. Sure, some of these people are in 
trouble, but there are avenues outside of that trouble.
  There has been a lot of talk about taxing banks that receive TARP 
money. I want to address that for a second because, the best I can 
tell, every bank that has received TARP money is paying it back at a 5-
percent dividend. We are making a profit. The only people who have not 
paid it back are GM and Chrysler, who probably never will. But if we 
put that much more of a burden on top of the people who are paying us, 
and paying a premium when we have a banking system under stress and 
duress, it is only making it more and more impossible for them to stay 
in business, for them to be vibrant and come back to bring credit to 
our communities.
  On that point, with mark to market enforced at a Draconian rate, with 
appraisal rules driving down the values of properties that are financed 
by the banks, with the regulatory environment being so stiff to 
recognize losses and deteriorate the balance sheet, there is not any 
credit for small business to speak of.
  We are making a recession that is deep, that is broad, and that is 
pervasive worse because of the unintended consequences of well-intended 
regulation.
  Last, I have enjoyed working with Senator Kaufman so much over this 
issue of short sales that I just want to put in one more plug for what 
we plugged in this entire session and encourage the SEC. In the 
collapse that took place in the markets, one of the things that went 
out of hand was the short selling of financial stocks to terrible lows. 
That short selling took place in large measure because there was no 
uptick rule, which was the old rule that was good for years on the 
stock market that once you had a declining value in the stock, if it 
ticked up on a trade, you stopped the short selling from continuing to 
take place.
  We need the SEC to revisit it. They took 30 days a year and a half 
ago and suspended it and it helped, but we don't need those speculating 
in the marketplace to take unfair advantage of the values of equities 
that are owned by Americans all over this country for the sake of 
making a buck on a short sale.

[[Page S389]]

  My remarks are very simple. There are unintended consequences to 
regulation, and we need to start looking at the cause and effect. Where 
we can find opportunities for banks to work out, for mark to market to 
be suspended, for appraisals to be based on cost to replace rather than 
comparable sales, we will begin to give the flexibility to the banking 
system to begin to recover, to stop the losses, stop the failures and, 
over time, recover our economy.
  I yield the remainder of my time.
  The PRESIDING OFFICER. The Senator from Pennsylvania.
  Mr. CASEY. Mr. President, I ask unanimous consent to speak as in 
morning business.
  The PRESIDING OFFICER. Without objection, it is so ordered. The 
Senator from Pennsylvania is recognized.
  (The remarks of Mr. Casey pertaining to the introduction of S. 2973 
are printed in today's Record under ``Statements on Introduced Bills 
and Joint Resolutions.'')
  Mr. CASEY. I yield the floor and suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. CASEY. I ask unanimous consent that the order for the quorum call 
be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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