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Dodd-Frank: Too Big to Work?

The third goal of Dodd-Frank was to protect consumers. For example, rather than letting the market set the prices, Dodd-Frank has mandated that debit card fees can't exceed $.21/ swipe (originally proposed as $.12/swipe). Prior to the regulation, the average was near $.45/swipe. While this appears to be consumer oriented, it ultimately interferes with the free market system and stifles innovation and technological advancement.

Of course, the poster child for consumer abuse is mortgages. The bureaucrats created by Dodd-Frank will undoubtedly write rules and regulations that will only increase the already ridiculous level of paperwork required in the mortgage process. But, it won't really help because abusive practices aren't recognized until they are rampant or something goes wrong. The new rules will only address the past abuses, not new abuses that arise. Once abuses are recognized, then, the legal system descends like the plague.

The abusive practices of some of the largest mortgage purveyors (like Countrywide, now owned by Bank of America (BAC)) are currently the subject of many significant lawsuits. BAC's recent second-quarter earnings were significantly impacted by legal settlements due to Countrywide's former practices, and I suspect that there will be more such settlements for BAC. Wells Fargo (WFC) just announced an $85 million settlement with the Fed over subprime lending. And JPMorgan (JPM) chief Jamie Dimon announced last week that because of such litigation, JPM is exiting the business.

Perhaps the other large private mortgage lenders will follow suit. After all, Dimon has always been an industry leader. The unintended consequence of mortgage abuse litigation, no doubt encouraged by the rhetoric surrounding this part of Dodd-Frank, should be a concern to the folks in Washington, D.C. But it isn't yet recognized. With a rapidly shrinking private mortgage lending industry, and with Fannie Mae (FNMA) and Freddie Mac (FMCC) bleeding cash and likely, in the current political climate, to be severely restricted once they are dealt with after the 2012 elections, the financing for the overhang in America's housing industry is likely to all but disappear. Then what?

Despite the best of intentions, Dodd-Frank was, from the beginning, doomed to be just another device of regulatory strangulation and the fostering of federal government growth. The real issues, like TBTF were inadequately addressed in the legislation. The attempt to address abuse could only be backward looking, and has encouraged an unintended consequence of the shrinking of the private sector mortgage market, the consequences of which are not yet widely recognized.

Robert Barone is a Principal and an Investment Advisor Representative of Ancora West Advisors LLC (Reno, NV) an SEC Registered Investment Advisor. The mention of companies in this article should not be considered as an offer to sell or a solicitation to purchase any securities of the companies mentioned. Please consult an Ancora West Investment Professional on how the purchase or sale of securities can be implemented to meet your particular investment objectives goals. Statistics and other information have been compiled from various sources. Ancora West Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information. Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States. A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II. A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778
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