On a grand level, the problem with Dodd-Frank and the Obama Administration’s attempts to reform the financial system is that they are trying to turn mortgage lending into a no-risk activity, when real estate investing is inherently risky. We can not re-legislate the laws of economics to change this reality.
The real problem was never weak lending standards to begin with. It was “free money” created by the Federal government, which ran loose monetary policies under Alan Greenspan from 1997 to 2004. This was compounded by reckless fiscal policies under the Bush Administration (which have been replaced by the even more reckless fiscal policies of the Obama Administration.) When you combine these developments with massive Federal subsidies and government backstops in the mortgage lending market, you create a market that provides a “free lunch” to commercial lenders, so long as they can find a way to make more loans.
We have not corrected any of these underlying problems. Instead, we’ve decided that the symptoms of this flawed system (weak underwriting standards) were actually the true problem, because it’s easier to blame the banks, rather than for the politicians in Washington to blame themselves.