As the housing bubble burst and the ensuing economic crisis gained steam, conservatives set about trying to find someone to blame for the meltdown of the mortgage market. First, it was Fannie Mae and Freddie Mac, and then loans made to low-income people through the Community Reinvestment Act.
As The Wonk Room has noted, the problem was actually the Bush administration’s failure to regulate the mortgage markets, while financial institutions developed ever-more sophisticated instruments for securitizing mortgage debt and selling it around the world.
Today, the Associated Press offered more evidence of Bush’s failure, reporting that his administration “ignored remarkably prescient warnings that foretold the financial meltdown,” and “backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed.”
In 2005, banking regulators proposed a series of regulations that “reads like a list of what-ifs”:
– Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.
– Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
– Regulators proposed a cap on risky mortgages so a string of defaults wouldn’t be crippling.
– Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
– Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.
“In hindsight, it was spot on,” but “people kind of looked at us regulators as old-fashioned,” said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency. Indeed, the administration “trusted market forces and discounted the value of government intervention in the economy,” thus dismissing the proposed regulations.
In September 2006, almost two years after regulators put forth the above list, the Bush administration finally got around to issuing its Guidance on Nontraditional Mortgages. However, the “guidance” was simply a list of suggestions and not a ban of worst practices.