Commonsense Regulatory Ideas Ignored Prior to Mortgage Meltdown

Commonsense Regulatory Ideas Ignored Prior to Mortgage Meltdown


What continues to bother me about the financial crisis is that so many people saw the warning signs and yet so many others refused to pay attention to the risks.

A new AP report reveals the extent to which the Bush administration ignored the danger. Here’s a list of what the administration could have done but refused to do in early 2006:

  • 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.

Banks told the Bush administration that such regulations would inhibit innovation and assured everyone that the risky mortgages were not risky at all. To be sure, the Bush administration was not alone in falling for this line of bull. Most of Congress and Wall Street also slipped on the rose colored glasses.

Obviously, 20/20 hindsight makes regulating easy. In the aftermath of a crisis, we can see where the levies should have been stronger. But the suggestions above weren’t exactly audacious. Even in my little corner of the real estate world (I do a lot of multifamily advertising), most everyone knew the lending practices were getting out of hand. What we didn’t know was how those outrageous ARMs were laced through the entire financial system like metastatic cancer.

I’m no regulatory reactionary. In fact, I think we should treat new regulations with suspicion. But there’s a difference between government control (which many regulations seek to achieve) and crisis prevention (which the above regulations were geared to achieve).

We would do well to recognize the difference in the future.

  • mike mcEachran

    It bothers me that there is still a meme out there that the melt-down had anything to do with congressional efforts to make housing affordable to low income people (i.e., minorities). I hope revelations like this puts an end to the thinly veiled racism of such poppy-cock. Simple, common-sense, rules and regulations would have prevented this greed-driven melt-down. Thank you for pointing out the diffence between common-sense regulations and “government control” as you put it. Now that we know the consequences of full deregulation, can we please all agree that common sense rules are neccessary?

  • Jim S

    It’s very simple. This morning as part of a piece on the outsourcing of government functions to private contractors NPR played that famous quote “In this present crisis, government is not the solution to our problem; government is the problem.”. Well, some people took the latter part of the quote and ran with it, extending it to the point of making government doing pretty much anything outside of a limited set of functions something that should be campaigned against. Regulation of business is one of those things that shouldn’t exist in their mindset. And they’ve been able to get a lot of people to partially buy into it. Enough so that stupidity and ideology have worked against regulation being implemented rationally.

  • Undertoad

    This article is a piece of crap. It contains no actual reporting. It contains a ton of simple conjecture on behalf of the reporter.

    It’s a set of things people said in the past. Sure, people say a lot of things. It fails to name the regulators and it fails to name the sets of regulations. Are they talking about Basel 2? Basel 2 didn’t help European banks who implemented it a year earlier. AIG’s actions weren’t prevented by Basel 2. And Basel 2 was implemented, finally, pre-crisis, so WTF? “They don’t like regulation.” Yet they DID regulate, apparently in the face of —

    “The administration’s… philosophy that trusted market forces and discounted the need for government intervention in the economy.”

    Well Mr. AP Writer, if they DID regulate, how do you get to throw that mighty generalization into the middle of your article? This isn’t an op-ed. This article, Mr. AP Writer, is going to be in the hard news section.

    I didn’t vote for W. But it’s easy to see, once you start to dig into the article, that there’s nothing there. It’s a non-story. It contains just enough information to formulate a narrative — and not enough information to look up the facts, to back up that narrative.

    Don’t get taken every time. Ignore AP stories about the economy. They are morons.

    Don’t believe me. Google Paris Welch, called out in the very second paragraph of the story. Why is this person the basis of the story? Who TF is she? Whom did she write to? Why should she have been taken seriously?

  • kranky kritter

    I tend to agree with undertoad. I am skeptical of the simplistic narrative that hordes of sensible folks were simply ignored because the federal government as led by the President was reflexively opposed to regulation. Even a cursory study of the underlying details shows that there weren’t exactly a ton of people complaining. Those complaining tended to be dour conservatives, and their concerns were brushed off not simply by anti-regulation business thralls(as progressives love to tell it), but by useful idiots across a wide spectrum whose only concern was to keep the spigot flowing.

    Most folks wanted to believe that we could keep going on and on and everything would be fine. The root story here should be about the negative side effects that came from far too long a period of too-low interest rates….bad signals, perverse motivations, corruption, and on and on.

    For example, people who were, comparatively speaking, poorer credit risks made out really well for some substantial period of time (prior to recent events) with ARMs because these mortgages didn’t work the way they should have. Rates stayed low, meaning there was little actual risk in failing to acquire a fixed-rate mortgage. Speculators flowed in, people with cheaply acquired capital chased the high returns coming from a distorted market, and poorly-understood investment schemes were cooked up and traded blithely. Lather, rinse, repeat.

    Sensible folks who understand only the basics of economics know that a market doesn’t work right when it fails to substantially raise the bar for credit on bad risks, and that loaning money to bad risks is a tale that always has an unhappy ending for someone.

    We won’t know just how unhappy a story this is for taxpayers until we really find out just what fraction of Americans has been spending grossly beyond their means. And as things get more and more unhappy, let’s not forget to notice that for these folks spending beyond their means, no one was twisting your arms. You talked yourselves into it with a blithe “I’m sure it will be fine.”

    You really can’t blame President Bush or greedy corporations for this part of the story. It’s simply not the case that, if only we had better regulations, we as a nation could have continued to keep spending further and further beyond the bounds of our means. It has always been a question of when and how, not if.

  • BenG


    Agreed on the point about taking personal responsibility for your actions, but I think this is over done. What you’re forgetting about is the final straw that broke the back of the financial institutions, and that is the “insurance” that the lenders used to mitigate their risk factor; that being the Credit Default Swaps and those other little creative devises they used to manipulate the markets on the enormous but ignored risk they taking on with these bad loans.

    They bundled these mortgages with the good, the bad, and the ugly, all under the title of Mortgage Backed Securities, and sold them around the world to “spread the wealth” and the RISK to cataclysmic levels. When the air came out of the housing bubble and the ‘spigot stopped flowing’, then the true nature of the deception in lending practices began to be revealed.

    These things that seemed to cause the crisis such as over extended credit and poorly designed mortgages, I believe, were simply the symptoms of what was at the root of the problem, which were: Too much concern for inflation which kept the Fed lowering interest rates beyond what was prudent, and too little concern from our Gov officials on Regulators being urged to do their jobs and insist on simple, common sense lending procedures, or watch rates increase to force compliance. The proof, for me, was the words of the local regulators and the FDIC during their recent testimonies to Congress. They were calling for these changes and couldn’t believe there was no action being taken.

  • Dennis

    This is what happens when you elect a sh-t man to the Presidency.

  • Nikolai

    Uh, shoulda, coulda, woulda… Sounds like my golf game, not an accurate reporting of why the U.S. is in dire straights with the subprime mortgage loan mess.

    The TRUTH is,

    1. The dems wanted no gov’t interference so that low-income families could “qualify” for a home loan, ANY home loan,
    2. The republicans wanted no gov’t interference so they could make money loaning, then brokering these thousands upon thousands of loans,
    3. The people getting the loans didn’t want the gov’t interferring, telling them they couldn’t afford a mortgage loan (even if they couldn’t) so,
    4. Along with all of the debt the whole damn country already had, the whole damn house of cards finally came tumbling down. The End.

    P.S. The moral to this story is what our grandparents TRIED TO TELL US…SAVE your pennies for a rainy day, and don’t buy it if you can’t afford it! Old fashioned yet SOUND advice…