Durable Financial Regulation

Edward J. Dodson

[Comments I submitted to Federal Reserve Bank economist Leonard Nakamura, 24 June, 2010, in response to a working paper he authored on Durable Financial Regulation]

Back in the late 1990s, I had a one-on-one meeting with Larry Small, the then President of Fannie Mae. We had a far-ranging discussion of the issues I raised in my message to you. One simple proposal I made seemed to make sense to him but he left the company, and I was not able thereafter to generate much interest except with the head of our research group. My proposal was simple. We were capturing appraised values of every mortgaged property in which we were involved as investor or guarantor. The loan originators were entering this value into their loan origination system and passing it on to us (and, I am pretty sure, reported under HMDA). The appraisal reports provided separate land value data on each property. All we needed to do was require that one additional data field be added for reporting purposes. With the land value data we would have a strong leading indicator of where property markets were heading. This would have been particularly valuable for properties with existing improvements, because the land-to-total value ratios tend to be much higher than with new construction. At minimum, this additional data would be of great value to both industry and regulatory analysts.

Leonard Nakamura responded:

You are, I am reasonably sure, quite right in what you propose, but getting from there to here is an enormous political task of the sort that does not get easily accomplished in a crisis. For the moment, we are caught within the constraints of the possible. Over the longer run, if people like you continue to advocate for better solutions to our regulatory and fiscal problems, we may do better the next time around! Thanks for you thoughts.