Hindsight, it is said, is always 20-20; it can also be depressing. There were ample warnings in 2005 and 2006 that the housing market was headed for the rocks because of excessively risky mortgage financing. While that crisis might not have been totally avoidable, it might have been greatly mitigated if the regulatory-averse Bush administration, under pressure from lenders, had not scrapped or softened regulations designed to control the kind of debt now described as “toxic.”
After reviewing the relevant regulatory documents, Associated Press reporter Matt Apuzzo concluded the Bush administration, ignoring “remarkably prescient warnings,” 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.”
From our vantage point among the wreckage, these proposed rules now seem like simple and obvious common sense, but then were portrayed by lenders as the dead hand of government regulation meddling in the marketplace.
Among the discarded rules, according to Apuzzo: The banks would have been required to step up efforts to verify that buyers actually had jobs and could afford their houses; certain exotic and high-risk loans would be deemed inappropriate for buyers with bad credit; and banks that bundled and sold mortgages were to be sure investors knew what they were buying.
In early 2006, an executive of Washington Mutual told regulators that these exotic loans were more safe and sound than many fixed mortgages, writes Apuzzo. Two years later, WaMu became our biggest bank failure. Lehman Brothers assured the regulators than an open market was the best way to manage risk and two years later it, too, was bankrupt.
This episode of an industry blindly thwarting regulation that might have saved it should be a subject of required study in our business schools.
ó Scripps Howard News Service