With a mortgage market in disarray, politicians were astonished that easy lending had come about because of lax regulation and easy facilitation by large Government Sponsored Enterprises (GSEs). Slamming their fists and vowing to protect the public, they set about writing legislation to make sure this kind of thing never happened again.

Congress restricted the abilities of the GSEs. It also set about creating a new oversight agency, to make sure this kind of imbroglio didn’t endanger the mortgage market, the economy and consumers again.

But just like the alcoholic who swears he’s reformed, while thirstily eying the ads for Captain Morgan, there are already signs that we’re ready to fall off the wagon of mortgage sobriety – even as we continue to wrestle with the hangover from the biggest mortgage bender this nation’s ever gone on.

That’s because those first two paragraphs weren’t written about the latest housing fiasco. They were about the last Big One to hit New England especially hard: The real estate recession of the early 1990s, and the S&L crisis that preceded it. They were written about a problem that got fixed, but which may soon get un-fixed by the current administration.

Back in the late 1980s, housing was really in a froth. An economic resurgence in the mid-1980s had couples who had just been dubbed “yuppies” sitting on porches and bidding up the price of homes. A Cape Cod house in Greenfield that sold for $18,000 in 1981 resold for $127,000 just eight years later. Banks were popping up left and right, and making mortgages was a road to easy profits.

Then, of course, everything collapsed, and the banking industry in New England collapsed right along with it. Almost every Friday from 1991 through 1993 saw the announcement of another local bank that had failed.

Yes, the engine of failure was a mad rush of financial institutions doling out money willy-nilly. But the oil that let that engine run so easily was access to cheap mortgage funds, and a regulatory body that didn’t look too closely at those banks’ lending decisions. Those were both entwined in one big GSE – and it wasn’t Fannie Mae and Freddie Mac.

It was the Federal Home Loan Bank system that had helped coagulate this economic heart attack.

Made For Mortgages

Federal Home Loan Banks provide mortgage liquidity for banks, thrifts and credit unions, mostly. The system is intertwined with fiscal disaster. It was born out of the Great Depression, when Congress created it to provide fluid funding for savings institutions, so thrifts would no longer fail when their long-term loans were overpowered by demand from short-term depositors. There are now 12 FHLBs in the nation, owned co-operatively by their bank and credit union members, but implicitly backed up by the federal government.

Simplistically, FHLBs make money by advancing their member institutions low cost funds to make mortgages. The more funds they advance, the more money they make. Since those members own shares in the FHLB, they want to see dividends. So each FHLB has an inherent desire to put out as much mortgage money as possible, to make enough money to pay dividends to its owners, who are also the people who want to take advantage of the low-cost mortgage advances.

What happened in the late 1980s and early 1990s was that the FHLBs also had regulatory authority over their members. When your regulator is also the one selling you the products they’re regulating, that gets a little dicey.

Congress finally wised up to this, and split those functions in 1991. The FHLBs continued to provide mortgage funding, and the precursor agency to today’s Federal Housing Finance Agency was created to provide regulatory oversight.

The FHFA, though, now oversees a lot more than just the Federal Home Loan Banks, and it’s feeling the pressure. So it’s come up with a spiffy idea. It wants the FHLBs to take on the task of evaluating banks’ compliance with the Community Reinvestment Act, a key measure of whether a bank is allowed to access FHLB funds.

Currently, the FHFA makes that determination independently. But it wants the FHLBs to be the arbiter going forward. The FHLBs themselves aren’t pushing for this, but they’re not stamping their feet against it. Meanwhile, bankers have gone ballistic about the idea. In a comment letter to the FHFA, the Massachusetts Bankers Association last month joined the five other New England state banking groups to protest the impropriety of the FHLBs to act as both lenders and regulators, and that doing so violates Congressional intent.

Of course, the Federal Reserve acts as regulator, lender and service provider, and the banking industry isn’t knock-kneed over it. So there are ways to make this work. But the idea that we should keep the dispensers of easy mortgage money separate from the judges of mortgage lending compliance does seem to hold a lot of attraction, especially after what we’ve just been through.

Since we keep making the same mistakes, and since we keep literally betting our houses on them, maybe we shouldn’t consolidate this power. The banks don’t want it because they fear additional regulation. But we should all shy away from this idea because it just creates too much temptation.

And too big an opportunity to create, again, another mortgage mess as soon as we forget about this one.

Vincent Michael Valvo is CEO of Agility Resources Group. He can be reached at vvalvo@agilityresourcesgroup.com