Passing Laws Without Legislators

Anybody catch the following in a Sunday Projo article about yet another economy-restricting practice?

The solution he refers to is the Home Valuation Code of Conduct, a set of standards for residential real estate appraisals that grew out of an investigation of the mortgage industry by New York Attorney General Andrew M. Cuomo. The code seeks to guarantee the independence of appraisals by building a "firewall" that prevents mortgage brokers from dealing directly with appraisers.

In exchange for being removed from Cuomo's investigation, mortgage giants Fannie Mae and Freddie Mac agreed they would not buy mortgages whose appraisals did not adhere to the code. The two government-sanctioned corporations buy individual mortgages, collect them into packages and sell the packaged mortgages to investors. The code took effect May 1.

Although the rules are not binding on anyone but Fannie Mae and Freddie Mac, lenders follow them because, if they didn't, they would not be able to sell their loans to the two companies. Because of their size, Fannie Mae and Freddie Mac can drive what happens in the mortgage industry. "Once Fannie does something, everybody else kind of jumps on board," says [Keith White Jr., owner of White Appraisal Co. in Warwick].

Without any legislation's being passed or even, presumably, proposed, the mechanism of leveraging huge, government-backed lenders has imposed new, costly regulations on the housing market. One can see how a similar principle might result in the proliferation of — oh, I don't know — derivatives based on insecure loans granted to lower-income borrowers and crash the economy.

The new policies, by the way, add two layers to produce that "firewall." One wonders what an investigation of names and relationships branching between those layers and various government officials might uncover.