Now chew on this (Wa Post, March 23, 2007) and tell me that something couldn't have been done sooner, outside of government intervention:
Senators blame mortgage crisis on "neglect" by Fed, Greenspan
By David Cho and Nell Henderson
The Washington Post
U.S. Sen. Christopher Dodd, D-Conn., criticized former Fed chief Alan Greenspan.
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WASHINGTON — Senators on Thursday accused the Federal Reserve and its former chairman, Alan Greenspan, of a "pattern of neglect" that fostered a crisis in the mortgage industry, which is putting more than 2 million families at risk of losing their homes.
Members of the Senate Banking Committee said the Fed had power to regulate risky lending practices but did not use it even as exotic mortgages for buyers with checkered credit helped drive up housing prices across the country.
The mortgage mess has rattled markets in recent weeks and spurred a broad reassessment of lending practices.
A top Fed officer defended the agency but acknowledged it could have stepped in earlier to curb risky lending.
"Given what we know now, yes, we could have done more sooner," Roger Cole, the Fed's director of banking supervision and regulation, told the committee between frequent senatorial interruptions.
Greenspan, in an interview later in the day, declined comment on whether the Fed was a lax regulator. But he disputed the senators' other allegations that he encouraged homebuyers to take on nontraditional mortgages.
At one point, committee Chairman Christopher Dodd, D-Conn., held up three large blue charts that demonstrated the Fed was aware as far back as 2003 that lending standards were deteriorating.
About the same time, Dodd said, Greenspan was touting adjustable-rate loans.
"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgages," Dodd quoted Greenspan in a speech in early 2004.
Greenspan noted Thursday that he retreated from those remarks about two weeks after he made them, saying he meant only "a narrow segment" of households might benefit from nontraditional mortgages.
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Greenspan also took issue with Dodd's criticism. "To suggest the Fed was pushing subprime mortgages or even adjustable-rate mortgages is just not accurate," he said. "I was merely identifying an arithmetically obvious issue, that some mortgage borrowers, admittedly a very small segment, would do better with a different product."
In June 2004, the Fed embarked on a two-year campaign of raising short-term rates to tame inflation.
But Dodd said it also hit homeowners who had loans with adjustable rates. While interest rates were going up and questionable lending practices were spreading, federal banking regulators were not "protecting hardworking Americans from unscrupulous financial actors," he said.
"In my view, these actions set the conditions for the perfect storm that is sweeping over millions of American homeowners today," said Dodd, who is running for president.
Other senators joined the fray. Sen. Robert Menendez, D-N.J., criticized federal regulators for being "asleep at the switch." Sen. Jim Bunning, R-Ky., asked how questionable lending practices could have spread "under Greenspan's watch."
Dodd said he was undecided whether legislation was needed to regulate "subprime" mortgages, loans given to homebuyers with blemished credit. The market for these loans has exploded in recent years as banks profited by packaging these mortgages as bonds and selling them on Wall Street.
The expansion of the lending industry was part of a nationwide push for homeownership. President Bush made buying a home a cornerstone of his "Ownership Society." Homeownership is now at a record 69 percent.
Now the real-estate boom is unraveling, with about $160 billion in mortgages falling into delinquency, regulators said at Thursday's hearing.
They added that as many as 1 million homeowners will see higher rates to their adjustable loans over the next year.
Dodd said the Fed could have invoked a 1994 Home Ownership and Equity Protection Act, or HOEPA, which obligates the agency to stop unfair and deceptive lending practices by federally and state-regulated mortgage lenders.
The Fed writes the HOEPA regulations, which cover all lenders. But Fed officials said they have enforcement power only over the banks they regulate, not over state-licensed mortgage brokers and lenders.
Fed officials noted they used their HOEPA authority twice in 2001 to bar two lending practices as "unfair and deceptive."
The committee also heard testimony from executives of lenders, including Countrywide Financial, the nation's largest originator of mortgages. They warned senators to be careful of writing new laws that would make it difficult for poor people to buy a home.
Dodd, in response, urged the executives to cut down on loans to borrowers who have little documentation to prove their income and to more accurately evaluate how much debt people can afford.
Sen. Jack Reed, D-R.I., grilled the executives about mortgage brokers who practice predatory lending — pushing risky mortgages or refinances on unsuspecting people and charging high closing fees.
Sitting next to these corporate executives was an elderly woman from Philadelphia and a music teacher from Minnesota who testified they were victims of such scams and now cannot afford their mortgage payments.
