In a white paper published today in response to a request from the Federal Reserve, Weiss Research stated that the current housing market woes and sub-prime mortgage default crisis can be blamed mostly on The Federal Reserve, Wall Street, and lending institutions, who acted without foresight and extreme opportunism.
“For many Americans, the dream of home ownership is turning into a nightmare. And although borrowers must also share a part of the blame, the burden falls on regulators and lenders to take firm steps to remedy their errors. Loan delinquencies and foreclosures are rising throughout the mortgage system, and the mortgage crisis is not limited to niche players that specialized in low-quality loans,” writes Weiss interest rate and real estate analyst Mike Larson.
The white paper focuses its criticism on several areas.
It says there needs to be loser monitoring and prompter action by the Federal Reserve to help avert run-away asset price inflation.
While the Fed cannot, as the popular media likes to mythically purport, merely raise or lower interest rates with the wave of a magic wand, it can take actions that are intended to cause interest rates to rise or fall and by certain percentages. This is called setting the target interest rate.
When the Fed sets a new target interest rate, investors react immediately. Larson is saying that the Fed should have seen the housing and lending bubble formulating and taken steps to raise interest rates, thereby discouraging excess borrowing and lending and also inspiring investors to take money out of equities-including mortgage-backed equities-and put it into bonds. These forces would have put market-based restrictions on lending practices and not allowed the bubble to grow.
The paper also says there needs to be a greater focus by regulators on banks and thrifts whose mortgage performance measures are showing the most stress.
Regulatory authorities during the housing boom kept their hands off banks and other mortgage lenders. The boom was so strong and mortgage-backed securities doing so well on the Street that authorities did not see any need to intervene or interfere.
As a consequence, a lot of lenders bit off more than they could chew with the amount of money they lent out, and with the defaults on mortgages coming in by the cartload those lenders are in financial trouble.
The paper additionally points out that rather than banning special-purpose mortgages, there should be procedures to limit them to the uniquely qualified borrowers for which they were originally designed.
During the housing market boom, loan officers sold variable interest rate mortgages and sub-prime loan programs to people indiscriminately, with low interest rates and huge demands making lenders want to qualify virtually every applicant for a mortgage. But different mortgage programs are tailored to different people, and there are some people who should not be qualified for any mortgage at a given time.
Several other advisories are also put forward in the paper.
“In order to pave the way for a sounder future, many of the sacrifices that were avoided in the past may have to be made in the present,” sums up Larson.
Sources of information:
Weiss Research (PR Newswire), “Federal Regulators, Lenders and Wall Street Blamed for Worsening Housing and Mortgage Crisis”