WASHINGTON, Dec. 1, 2008
Meltdown Warnings Ignored, Analysis Shows
AP: Bush Administration Backed Off Recommended Crackdowns On Risky Mortgages
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"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.
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See all 142 CommentsBut, But, but..Bill Clinton and Barney Frank.......
Of course that is what hasn''t already been nationalized by Shrub and his GOPer weenies!
The one thing that can be truthfully said is that businesses didn''t fail because they were over-regulated! Perhaps the failed because they were under-regulated and the CEOs and management teams had an abundance of greed and a lack of sense...
Which is why two things must happen...
1) Re-elect Obama in 2012
2) Never, ever let the GOPers ever govern again...although personally with their current ''base'' and their losing leadership team may keep them out of power for a good long while.
3) We must never forget that FISCAL-CONSERVATIVE really means BORROW-BORROW-BORROW-AND FORGET TOMORROW!
Bush is without doubt not only the worst president ever, he was the stupidest!
A Harvard MBA ?
Yeah, right.
The old man bought it for him.....
This all goes together with the economic philosphy of the Great Emperor Bush II and neocon Fascist Socialist Nazi Republicans everywhere which is basically that GREEED IS GOOD, and DON''T THINK AHEAD!!!
Besides, the Great Emperor was assured that even if there was a mortgage meltdown, that it would only affect the homes of the shrinking middle class which the Emperor feels is of no consequence anyway. The only thing of importance was that the wealthy would not lose their mansions or numerous estates and other properties.
SIG HEIL, WE NEVER THINK AHEAD!!!, BUSH!!!
and do nothing I seen this before bush did not vote
for him or obamanation
As if we needed any more....
By the way, if anyone''s interested, do a bit of research on the Bush family..the "connections" and "agendas" are very interesting. One interesting fact is that two of the largest shareholder''s in the Carlyle (sp?) group, were the Bin Laden family and the Bush family..hmmmmm.
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.
FUNNY HOW THE STORY FORGOT TO MENTION THAT.
Bush has been a MAJOR disappointment to most Republicans. EVEN REPUBLICANS IN CONGRESS TRIED TO STOP HIM. And how strange that DEMOCRATS BLOCKED THE REPUBLICANS FROM BLOCKING BUSH.
Hagel has now given up, and he has decided not to seek re-election.
Another good guy bites the dust, while the criminals in Congress play. They have a LOWER approval rating than Bush, yet most of them go re-elected this year.
STUPID VOTERS GET STUPID GOVERNMENT.
cought with there hands in the S&L cookie jar
But my real estate instructor TOLD US that this meltdown was coming. Why? Because THIS EXACT SAME MELTDOWN happened in the 1980''s because of the ARM''s that people had used to buy houses. When the economy hiccuped, they got foreclosed.
That''s why ARM''s were outlawed. Until the reckless Clinton years, when BIPARTISAN SUPPORT made ARM''s legal again. Thus setting us up for THE EXACT SAME MELTDOWN all over again.
Then stupid Bush DIDN''T UNDO this insanity. He just stood there holding the lit firecracker that Clinton handed him.
Now the firecracker has blown up in his face, as anyone with common sense knew would happen. And Bush is standing there with a bewildered look on his face.
Who''s to blame for handing a lit firecracker to the stupid kid who doesn''t know to throw it away before it blows up in his face?
BOTH OF THEM!!!!
Posted by demswin08 at 09:40 AM : Dec 01, 2008
Then they''re STUPID for failing to do their own research.
However, the ultimate responsibility remains with the people who accepted loans they couldn''t reasonably expect to pay and counted on a never ending cycle of increasing home value.
I still think a class action law suit against the banks would be appropriate - but it was pointed out that Barney Frank, et al, FORCED Fannie Mae and Freddie Mac to give questionable loans...
Posted by demswin08 at 09:36 AM : Dec 01, 2008
PROVE IT. NAME the legislation that would have stopped this crisis, but it was blocked in the way you describe.
NAME IT!!!!!
REPUBLICAN Chuck Hagel introduced legislation to crack down on the Clinton-era accounting fraud that was still taking place at Fannie Mae and Freddie Mac.
DEMOCRATS Barney Frank and Chris Dodd blocked it and it never even went to a vote in Congress.
WHY DO DEMOCRATS HAVE TO LIE SO MUCH???
Posted by lf1952 at 09:46 AM : Dec 01, 2008
Bush''s biggest mistake was that he foolishly continued the policies of the Clinton administration. Even though most of those policies were short-term stunts that were guaranteed to blow up in the NEXT president''s face if he didn''t discontinue them in time.
Once again, Clinton handed a lit firecracker to the stupid kid Bush. Then Bush just stood there holding the lit firecracker instead of throwing it away. When it blew up in his face, he just stood there looking bewildered.
Who''s to blame for handing a lit firecracker to the stupid kid? BOTH OF THEM.
Posted by txgrouch2007
You freakin belong in texas. The ''measure'' proposed by hagel would have made it impossible for ANYONE with less than a $200,000.00 income to get a mortgage. READ THE FREAKIN PROPOSAL, its online. While Frank is not blameless in this fiasco, stop trying to make the ''congressional republicans'' look like saints. The measure would never had passed and it was all to play politics, an attempt to make the democrats look bad. Go back to your doublewide and turn on ****** rush and try to get some more BS that might make sense. (GOOD LUCK WITH THAT!)
Posted by lady_organs at 09:43 AM : Dec 01, 2008
Democrats NEVER take responsibility. It is THE underlying foundation of their ENTIRE agenda - avoiding all responsibility all the time.
When has ANY Democrat taken the blame for ANYTHING, EVER? NOT EVEN ONCE has any Democrat found fault with Bill Clinton, for example.
Remember the Democrat who replaced Mark Foley, who was forced out over his morality scandal? Then it turned out that Democrat had his own morality scandal. But when he got caught HE REFUSED TO LEAVE OFFICE.
Self-righteous judgemental hypocrites, all of them.
He keeps taking others down with him just to get what he wants.
Posted by demswin08 at 09:48 AM : Dec 01, 2008
Bush was born in 1946. Paulson was born in 1946. THE BIG BROTHERS of the Baby Boomer Brat pack.
That spells NO CREDIBILITY.
Well, except that 60% of Congress are Boomers.
BTW, Bill Clinton was born in 1946. As was Joseph Hazelwood (look it up).
Are you thinking yet?
Junkyard dogs Sean Hannity and Rush Limbaugh told us over and over again that ''buy-out-firms'' and ''hedge-funds'' were real American companies who produced and contributed to this country.
While we believed Rush Limbaugh and Sean Hannity, these ''buy-out-firms'' and ''hedge-funds'' were looting our country with ''structured-finance-derivative-swap-CDO'' krap.
It''s so sad, I wish Obama would exile Hannity and Limbaugh for ruining America.
Posted by ToldYouSo74 at 09:58 AM : Dec 01, 2008
Look who''s talking.
When has ANY Democrat EVER taken responsibility for ANYTHING????
When has ANY Democrat EVER found fault with, say, Bill Clinton, for example???
Did Bill Clinton EVER do ANYTHING wrong, in your opinion? Or is he PERFECT IN EVERY WAY???
Posted by frankie2fing at 09:52 AM : Dec 01, 2008
LOL! Yah, it''s that GIANT RIGHT-WING CONSPIRACY again!
When has ANY Democrat EVER taken responsibility for ANYTHING?????
Posted by whitemale08
Who was dumb enough to do that?
Posted by demswin08 at 09:48 AM : Dec 01, 2008
THANK YOU! Coming from you, that''s a MAJOR CONFESSION!!!
Posted by txgrouch2007
How can you say that; when you look up self-righteous judgemental hypocrites in the dictionary, there''s a picture of a church with a Palin 2012 sign on it.
Posted by whitemale08
Who was dumb enough to do that?
Posted by usclimey at 10:05 AM : Dec 01, 2008
The same kind of imbeciles who believed Michael Moore.
Then the unthinkable happened. Carlyle Capital went bankrupt. Who? That%u2019s Carlyle as in Carlyle Group. James Baker, Senior Counsel. Notable partners, former and past: George Bush, the Bin Laden family and more dictators, potentates, pirates and presidents than you can count.
The Fed had to act. Ben Bernanke opened the vault and dumped $200 billion on the poor little suffering bankers. There was no (quid) of a foreclosure moratorium for the (pro quo) of public bailout. Not one family was saved, but not one banker was left behind.
Posted by jh6379again at 09:49 AM : Dec 01, 2008
Comments like this only diminish your integrity.
Instead of regulating the banks that had run amok, Bush%u2019s regulators went on the warpath against states attempting to stop predatory practices. Making an unprecedented use of the legal power of federal pre-emption, Bush-bots ordered the states to NOT enforce their consumer protection laws.
Indeed, the feds actually filed a lawsuit to block Elliot Spitzer%u2019s investigation of ugly racial mortgage steering. Bush%u2019s banking buddies were especially steamed that Spitzer hammered bank practices across the nation using New York State laws.
When the housing bubble burst and the paint flaked off, investors were left with the poop and the bankers were left with bonuses. Countrywide%u2019s top man, Angelo Mozilo, will be paid a $77 million buy-out bonus this year on top of the $656 million, over half a billion dollars, he pulled in from 1998 through 2007.
But there were rumblings that the party would soon be over. Angry regulators, burned investors and the weight of millions of homes about to be boarded up were causing the sharks to sink. Countrywide%u2019s stock was down 50%, and Citigroup was off 38%, not pleasing to the Gulf sheiks who now control its biggest share blocks.
cont
by Greg Palast
Since the Bush regime came to power, a new species of loan became the norm, the (sub-prime) mortgage and its variants including loans with teeny (introductory) interest rates. From out of nowhere, a company called Countrywide became America%u2019s top mortgage lender, accounting for one in five home loans, a large chunk of these (sub-prime.)
Now, what kind of American is (sub-prime.) Guess. No peeking. Here%u2019s a hint: 73% of HIGH INCOME Black and Hispanic borrowers were given sub-prime loans versus 17% of similar-income Whites. Dark-skinned borrowers aren%u2019t stupid, they had no choice, they were (steered) as it%u2019s called in the mortgage sharking business.
Steering, sub-prime loans with usurious kickers, fake inducements to over-borrow, called fraudulent conveyance or predatory lending under US law, were almost completely forbidden in the olden days (Clinton Administration and earlier) by federal regulators and state laws as nothing more than fancy loan-sharking.
But when the Bush regime took over, Countrywide and its banking brethren were told to party hearty, it was OK now to steer%u2019m, fake%u2019m, charge%u2019m and take%u2019m.
cont
Posted by usclimey at 10:06 AM : Dec 01, 2008
Oh, yes it''s tough on you, I know. The news doesn''t give you a daily fresh photo of your favorite glamour girl anymore.
But I''m sure you have your secret stash of photos of her for you to drool over until then.
Oh, the stains - drool stains are the HARDEST to get out without ruining the picture...
thay had five or six groups in an office the first
group oh forgot the group is made up of two people
now they would buy a property with banks lones
sell it to the next group on lones by the time the
property made it too the last group the price ballooned
10 or 15 times now they would bankrupt the last group
the bank was stuck and all the partners walked away
with a pocket full and there still doing this today
The Bush Administration are MASTERS at SHIFTING BLAME and POINTING THE FINGER at somebody Else. PRO''s at Shifting Blame.
Instead of regulating the banks blah blah blah blah blah blah blah
cont
Posted by mavnomore at 10:08 AM : Dec 01, 2008
Say, cont cont, can you please SUMMARIZE your rantings to A FEW LINES???
Some of us have better things to do than read your mini-novels that spread over three posts.
Posted by MatrixRX2003 at 10:10 AM : Dec 01, 2008
I asked first.
When has ANY Democrat EVER taken the blame for ANYTHING???
Posted by MatrixRX2003 at 10:10 AM : Dec 01, 2008
I think that most politicians master shifting the blame. We as consumers are to blame as well. So if we hold them accountable (as we should), we are to be held accountable as well.
Posted by hatesthecolt at 10:09 AM : Dec 01, 2008
Nope, sorry. Bush had less then 8 months before 9/11/2001, but they all say it was "his watch."
So Obama can''t keep blaming Bush after 9/11/2009.
YOU MADE THE RULES, NOW YOU HAVE TO LIVE BY THEM!
Obama''s watch OFFICIALLY begins on 9/11/2009. NO MORE BLAMING BUSH after that.
Let''s see how the Democrats handle their ABSOLUTE POWER. See if they can handle it any better than the GOP did.
DEMOCRATS WILL BE TO BLAME FOR EVERYTHING starting next year.
Posted by jh6379again at 10:14 AM : Dec 01, 2008
It''s not naivety, the white house received thousands of warnings, which one do you act upon. Also, there was not a defined warning with enough details at that time. The WTC was attacked in the 90''s as well. Why was that allowed?
235 Democrats
Who is in control of the congress?
Posted by jh6379again at 10:15 AM : Dec 01, 2008
Sounds like the Democrats. Was that supposed to be a hard question?
Here''s one for you - do Republicans have a MAJORITY in either house of Congess?
DON''T BLAME THE REPUBLICANS for what Congress does. THEY CAN''T DO ANYTHING THEMSELVES without a majority.
Posted by FloydZeppd at 10:13 AM : Dec 01, 2008
Based on your other posts, you''re the one doing most of the whining around here.
Posted by txgrouch2007
Where have you been? Democrats have been to blame for EVERYTHING since about 1830.
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