WASHINGTON -- Members of Congress are pointing angry fingers at Alan Greenspan and other U.S. bank regulators for fostering a mortgage market "on steroids" and failing to thwart a predictable subprime meltdown.
Christopher Dodd, chairman of the U.S. Senate banking committee, complained yesterday Mr. Greenspan, who retired as U.S. Federal Reserve Board chief last year, was an early proponent of the type of exotic mortgages that are now being blamed for an epidemic of foreclosures across the United States.
Mr. Greenspan urged lenders to move away from traditional fixed-rate mortgages in a June, 2004, speech as a way to help U.S. consumers, Mr. Dodd told a hearing probing the subprime mortgage meltdown. "The Federal Reserve seemed to encourage the development and use of adjustable rate mortgages that today are defaulting and going into foreclosure at record rates," Mr. Dodd complained.
The Fed then did little to rein in banks as lending standards deteriorated in a mortgage market that appeared to be "on steroids," said Mr. Dodd, Connecticut Democrat.
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"Our nation's financial regulators were supposed to be the cops on the beat. . . . Yet, they were spectators for far too long," he added.
The committee heard testimony from two consumers who said they were lured into mortgages with initial low "teaser" interest rates that quickly ratcheted up to unaffordable levels. These so-called adjustable-rate mortgages, or ARMs, were commonly sold to subprime borrowers, with poor credit scores and low incomes.
"It seems to me you were all asleep at the switch," New Jersey Democrat Robert Menendez said pointedly as he quizzed officials from the Fed, the Treasury department, the Office of Thrift Supervision and the Federal Deposit Insurance Corp.
There are roughly $1.28-trillion (U.S.) subprime loans outstanding, of which 14.4 per cent were in default at the end of 2006. But regulators said the problem could get worse this year and next, when interest rates on 1.8 million subprime loans are due to rise.
The regulators complained they lacked authority over a proliferating industry of mortgage intermediaries, who seemed to fall between the cracks of federal and state oversight. But at least one witness acknowledged the Fed probably could have acted quicker to tighten lending standards before so many borrowers got in over their heads. "Given what we know now, yes, we could have done more sooner," said Roger Cole, the Fed's director of banking supervision and regulation.
Mr. Cole also promised to meet with Fed chief Ben Bernanke and the board to extend existing rules governing standards to all state and federal lenders. But he said the ultimate responsibility lies with lenders.
Mr. Dodd has said he'll soon introduce legislation to crack down on lenders who prey on the poor and uneducated with trick mortgages. "What happened already has got to stop," he insisted.
But executives of several mortgage companies told the committee that regulation would make credit problems worse by denying loans to worthy home buyers.
"Regulation will raise the price of loan products to the consumer," warned Laurent Bossard, chief executive of WMC Mortgage of Burbank, Calif. He urged the committee to avoid an "overcorrection."
An executive of Countrywide Financial Corp., the top U.S. mortgage lender, told the committee that subprime defaults for 2006 loans are on a pace to exceed its previous record high of 9.9 per cent.
New Century Financial, the No. 2 U.S. subprime lender, turned down an invitation to appear, eliciting a jab from Mr. Dodd.
"New Century played a role in pushing unaffordable subprime loans and they should be here to explain their actions," he said.
Other witnesses said the real villains in the subprime meltdown aren't regulators, lenders or consumers, but Wall Street, which had an insatiable appetite for mortgage-backed bonds.
"The real market demand for bond services is on Wall Street," explained Irv Ackelsberg, a Philadelphia real estate lawyer and consumer advocate. "That's the real market and the real culprit."
North Carolina bank commissioner Joseph Smith told the hearing that lending standards lapsed because of a "fee-driven, volume machine" that pushed mortgage brokers to sell mortgages to people who they knew could not afford them. "The animal instinct took control," he said.
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