WASHINGTON, Dec. 1, 2008
Meltdown Warnings Ignored, Analysis Shows
AP: Bush Administration Backed Off Recommended Crackdowns On Risky Mortgages
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In-Depth Meltdown Primer Questions and answers regarding various aspects of the current economic crisis.
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In-Depth Q&A: Mortgage Help New plan to allow lenders to alter delinquent loans more quickly.
"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
Bowing to aggressive lobbying - along with assurances from banks that the troubled mortgages were OK - regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
"These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages," David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.
The administration's blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.
Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come. Many executives remain in high-paying jobs, even after their assurances were proved false.
In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:
Those proposals all were stripped from the final rules. None required congressional approval or the president's signature.
"In hindsight, it was spot on," said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending.
Federal regulators were especially concerned about mortgages known as "option ARMs," which allow borrowers to make payments so low that mortgage debt actually increases every month. But banking executives accused the government of overreacting.
Bankers said such loans might be risky when approved with no money down or without ensuring buyers have jobs but such risk could be managed without government intervention.
"An open market will mean that different institutions will develop different methodologies for achieving this goal," Joseph Polizzotto, counsel to now-bankrupt Lehman Brothers, told U.S. regulators in a March 2006.
Countrywide Financial Corp., at the time the nation's largest mortgage lender, agreed. The proposal "appears excessive and will inhibit future innovation in the marketplace," said Mary Jane Seebach, managing director of public affairs.
One of the most contested rules said that before banks purchase mortgages from brokers, they should verify the process to ensure buyers could afford their homes. Some bankers now blame much of the housing crisis on brokers who wrote fraudulent, predatory loans. But in 2006, banks said they shouldn't have to double-check the brokers.
"It is not our role to be the regulator for the third-party lenders," wrote Ruthann Melbourne, chief risk officer of IndyMac Bank.
California-based IndyMac also criticized regulators for not recognizing the track record of interest-only loans and option ARMs, which accounted for 70 percent of IndyMac's 2005 mortgage portfolio. This summer, the government seized IndyMac and will pay an estimated $9 billion to ensure customers don't lose their deposits.
Last week, Downey Savings joined the growing list of failed banks. The problem: About 52 percent of its mortgage portfolio was tied up in risky option ARMs, which in 2006 Downey insisted were safe - maybe even safer than traditional 30-year mortgages.
"To conclude that 'nontraditional' equates to higher risk does not appropriately balance risk and compensating factors of these products," said Lillian Gavin, the bank's chief credit officer.
At least some regulators didn't buy it. The comptroller of the currency, John C. Dugan, was among the first to sound the alarm in mid-2005. Speaking to a consumer advocacy group, Dugan painted a troublesome picture of option-ARM lending. Many buyers, particularly those with bad credit, would soon be unable to afford their payments, he said. And if housing prices declined, homeowners wouldn't even be able to sell their way out of the mess.
It sounded simple, but "people kind of looked at us regulators as old-fashioned," said Brown, the agency's former deputy comptroller.
Diane Casey-Landry, of the American Bankers Association, said the industry feared a two-tiered system in which banks had to follow rules that mortgage brokers did not. She said opposition was based on the banks' best information.
"You're looking at a decline in real estate values that was never contemplated," she said.
Some saw problems coming. Community groups and even some in the mortgage business, like Welch, warned regulators not to ease their rules.
"We expect to see a huge increase in defaults, delinquencies and foreclosures as a result of the over selling of these products," Kevin Stein, associate director of the California Reinvestment Coalition, wrote to regulators in 2006. The group advocates on housing and banking issues for low-income and minority residents.
The government's banking agencies spent nearly a year debating the rules, which required unanimous agreement among the OCC, Federal Deposit Insurance Corp., Federal Reserve, and the Office of Thrift Supervision - agencies that sometimes don't agree.
The Fed, for instance, was reluctant under Alan Greenspan to heavily regulate lending. Similarly, the Office of Thrift Supervision, an arm of the Treasury Department that regulated many in the subprime mortgage market, worried that restricting certain mortgages would hurt banks and consumers.
Grovetta Gardineer, OTS managing director for corporate and international activities, said the 2005 proposal "attempted to send an alarm bell that these products are bad." After hearing from banks, she said, regulators were persuaded that the loans themselves were not problematic as long as banks managed the risk. She disputes the notion that the rules were weakened.
In the past year, with Congress scrambling to stanch the bleeding in the financial industry, regulators have tightened rules on risky mortgages.
Congress is considering further tightening, including some of the same proposals abandoned years ago.
© MMVIII The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.
Add a Comment See all 142 Comments
- In today%u2019s world you can%u2019t even join a health club without signing a contract, which often contains a small mountain of %u201C legalese.%u201D Signing up for a basic internet provider involves signing an agreement which includes a lot of %u201Csmall print.%u201D In most cases both parties involved in these transactions are honest and have only one thing in mind, an honorable business agreement. In cases where huge amounts of money are involved greed tends to override peoples better judgment, that%u2019s why there are rules and regulations.
Bottom line the Republicans policy of deregulation has led us down this same path before and they still refuse to admit any culpability. - Reply to this comment
- Here are the facts:
(R)Phil Gramm wrote the CFMA (Commodities Futures Modernization ACT) which PROHIBITED any REGULATION of CREDIT DEFAULT SWAPS.
Phil Gramm''s deregulation set the stage for an explosion of banks slicing up subprime mortgages, bundling them with other mortgage slices to hide the credit risks, and selling mortgage stew to other investment firms.
One economist said, "McCain is counting on people having very short memories and not connecting some pretty obvious dots here." - Reply to this comment
- Posted by davidj0324
"In every voluntary transaction, each party attempts to obtain maximum payment for his product or service."
Anyone ever tell you that the word naive isn''t listed in the dictionary? - Reply to this comment
- Posted by davidj0324
How do you explain the fact that dead people, yes dead people, were given "predatory loans?" - Reply to this comment
- Meltdown Warnings Ignored, Analysis Shows
AP: Bush Administration Backed Off Recommended Crackdowns On Risky Mortgages
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Of course he did. He did nothing that was good for our country. Every thing he did, every act, every thought he had, was destructive to our well being as Americans. Worst president in the history of the US. - Reply to this comment
- People call Bush a moron and at the same time accuse him of pulling off the most devious schemes. The two are mutually exclusive. These people who are suffering from a form of paranoid dyslexia that keeps them from seeing an obvious paradox.
- Reply to this comment
- [It was shot down in the Finance Comittee when Barney "Meltdown" Frank led Democrat committee members to vote UNANIMOUSLY against the measure, and Democrat committee chair Chris Dodd refused to bring it to a vote by Congress.
(Posted by txgrouch2007 at 09:36 AM : Dec 01, 2008)
Not trying to argue here, but when a party is in power, aren''''t they usually the committee chairmen? If so, how would Dodd be the committee chairman back in 2005?]
[Posted by gramto8 at 03:31 PM : Dec 01, 2008]
don''t confuse him with the facts ... they''ll get in the way of his agenda. - Reply to this comment
- Bush. Worst president in US history.
- Reply to this comment
- Well now just hold on. The people who caused all of this were able to pay themselves big bonuses and then pay themselves a huge severance as they fled the companies. I''m sure they are quite safe and smug somewhere. Paid off home in a gated community. Cash in hidden vaults. Mexicans hired to come by twice a week to clean bathrooms and provide personal services.
- Reply to this comment
- More socialist drivel. Let me get this straight, a bank provides a loan to a debtor, who doesn''t pay the loan back--and the bank is somehow at fault? What kind of reasoning is this? The term "predatory lending" is meaningless. In every voluntary transaction, each party attempts to obtain maximum payment for his product or service. The banks have done nothing unethical--though they shouldn''t be bailed out for making bad business decisions.
- Reply to this comment
- The average loan agreement was amended with a new version every 3 to 6 months for the last 5 years. Every new version was a forfeiture of the legal rights of the customer and protection clauses for the lender. Opting out by not accepting the new terms meant losing money spent for fees, points, and equity. The banking practices are socialistic for a sub-society of bankers.
- Reply to this comment
- More socialist drivel. Let me get this straight, a bank provides a loan to a debtor, who doesn''t pay the loan back--and the bank is somehow at fault? What kind of reasoning is this? The term "predatory lending" is meaningless. In every voluntary transaction, each party attempts to obtain maximum payment for his product or service. The banks have done nothing unethical--though they shouldn''t be bailed out for making bad business decisions.
- Reply to this comment
- More socialist drivel. Let me get this straight, a bank provides a loan to a debtor, who doesn''t pay the loan back--and the bank is somehow at fault? What kind of reasoning is this? The term "predatory lending" is meaningless. In every voluntary transaction, each party attempts to obtain maximum payment for his product or service. The banks have done nothing unethical--though they shouldn''t be bailed out for making bad business decisions.
- Reply to this comment
- More socialist drivel. Let me get this straight, a bank provides a loan to a debtor, who doesn''t pay the loan back--and the bank is somehow at fault? What kind of reasoning is this? The term "predatory lending" is meaningless. In every voluntary transaction, each party attempts to obtain maximum payment for his product or service. The banks have done nothing unethical--though they shouldn''t be bailed out for making bad business decisions.
- Reply to this comment
- More socialist drivel. Let me get this straight, a bank provides a loan to a debtor, who doesn''t pay the loan back--and the bank is somehow at fault? What kind of reasoning is this? The term "predatory lending" is meaningless. In every voluntary transaction, each party attempts to obtain maximum payment for his product or service. The banks have done nothing unethical--though they shouldn''t be bailed out for making bad business decisions.
- Reply to this comment
- More socialist drivel. Let me get this straight, a bank provides a loan to a debtor, who doesn''t pay the loan back--and the bank is somehow at fault? What kind of reasoning is this? The term "predatory lending" is meaningless. In every voluntary transaction, each party attempts to obtain maximum payment for his product or service. The banks have done nothing unethical--though they shouldn''t be bailed out for making bad business decisions.
- Reply to this comment
- Any Meltdown Warnings to Republican President Bush is totally useless.
Just ask Bush today if we are in an Economic Meltdown right now and he will answer ''NO, we are not''. - Reply to this comment
- The NeoCons should learn from our President Elect and the nominated Secretary of State how 2 enemies can work together as in United States of America instead of Divided States of America.
- Reply to this comment
- There is no melt down. This is the aftermath of an economic coup d%u2019tat. The financial institutions propaganda machine has the public believing that this is the victims fault. First they conned home owners to refinance solid loans, then they funneled that money into the sub-prime loans, then they raised credit card rates and fees to force more restructuring. As defaults hit the market, they had the debt combined with penalties and 31 to 38% interest rates double and tripling the amounts owed. Sold off the loans, wrote off the money never owed them, and shorted the market as their stocks plummeted. They never lost a penny. Walked away with billions, and are now getting bailout packages with bonuses built into them. Now their buying and investing in bill collector companies!
- Reply to this comment
It was shot down in the Finance Comittee when Barney "Meltdown" Frank led Democrat committee members to vote UNANIMOUSLY against the measure, and Democrat committee chair Chris Dodd refused to bring it to a vote by Congress.
Posted by txgrouch2007 at 09:36 AM : Dec 01, 2008
Not trying to argue here, but when a party is in power, aren''t they usually the committee chairmen? If so, how would Dodd be the committee chairman back in 2005?- Reply to this comment
