Who Solves Problems Faster–Courts or Regulators?

A CNBC article today notes that Bank of America has agreed to reduce certain homeowners’ principal by up to $150,000 if they’re underwater on their mortgages and satisfy certain other conditions.  This action helps settle lawsuits brought by state attorneys general and the Department of Justice over the “robosigning” of foreclosure documents.

The really interesting kicker, though, is in the last paragraph of the article. It says many of the 5.59 million mortgage loans that are delinquent or in foreclosure process are owned by Fannie Mae and Freddie Mac. Their regulator, the Federal Housing Finance Agency, has not agreed on how to reduce the principal on their loans. So while some underwater borrowers with loans held by Bank of America may get relief, borrowers with loans held by Fannie and Freddie are out of luck for now. 

Putting aside the argument over the validity of the lawsuit or the wisdom of mortgage principal reduction, there’s a contrast in this story that’s fascinating to a student of regulation.  In a wide variety of areas, from workplace safety to environmental protection to online privacy, proponents of expanded regulation argue that the court system is too old-fashioned and clunky to protect us from hazards. Enlightened regulators, on the other hand, can expertly and rapidly solve pressing problems.

The problem with this argument is that it compares our imperfect court system with an unattainable ideal of perfectly-functioning regulation managed by omniscient and benevolent beings. The relevant comparison is between the actual functioning of courts and regulatory agencies staffed by ordinary human beings. And at least on mortgage principal modification, it looks like the courts are working faster than the regulators.