“In hindsight, it was spot on.”
-Jeffrey Brown, former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending.
A brutally damning article about the warnings the Bush administration received and ignored was published this morning by the Associated Press. The AP summed up the philosophy of the Bush White House, writing: “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.”
The Bush administration 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. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.
“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.
Bank regulators had proposed new guidelines for writing risky loans in 2005, but were rebuffed by the White House. The proposed regulations might have avoided the worst fo the housing and credit crisis, had they been enacted.
What was so especially damning was these proposals were all stripped from the final Administrative rules by the Bush White House. None required congressional approval or even the president’s signature:
• Before banks could purchase mortgages from brokers, they should verify the process to ensure buyers could afford their homes.
• 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.
The banks that lobbied most aggressively against the rules reads like a who’s who of bankruptcy and FDIC conservatorship: IndyMac, Countrywide Financial, Washington Mutual, Lehman Brothers, and Downey Savings.
US diluted loan rules before crash
AP, December 1, 2008
Government warned of mortgage meltdown
Regulators ignored warnings about risky mortgages, delayed regulations on the industry.
December 1, 2008: 6:38 AM ET