We're glad the Administration finally recognizes that the subprime crisis was caused by reckless lenders who've been inadequately supervised by federal regulators. The President's Working Group on Financial Markets recognizes the problem was caused largely by "weak government oversight," which allowed loan originators to make loans without regard to whether families could afford to repay them. This diagnosis is correct, but it supports a broader set of solutions than those proposed by the Working Group to prevent another market meltdown and to help as many families as possible who've been snared by the current mess.
The Working Group would rely on rules the Federal Reserve Board proposed last December with the stated goal of banning unfair and deceptive lending practices. These proposed rules are insufficient because they would not do enough to curb the financial incentives that have led brokers and lenders to engage in reckless lending practices. They would not adequately restrict the kickbacks that mortgage brokers receive from lenders in exchange for putting families into loans that cost more than they should. Nor would they curb the prepayment penalties that have locked families into bad loans----in some ways the proposed rules would increase these penalties. Nor would the rules hold lenders and Wall Street investors sufficiently accountable for loans to borrowers who clearly couldn't afford them.
To ensure that a similar mortgage crisis never happens again, Congress, the Federal Reserve Board and bank regulators need to adopt strong rules banning unfair, reckless lending practices, and they need to make sure those rules have teeth and are enforced. Wall Street investors who buy home loans, and thus become the holder of the loans, also need to accept responsibility for ensuring these loans are fair and follow the law.
To help distressed families, Congress also needs to allow courts to adjust existing home loans to fair market values, a change that would prevent 600,000 families from losing their homes and would give lenders at least as much as they would recover from foreclosure. By avoiding those foreclosures, millions of neighbors in surrounding homes would be spared over $70 billion in losses in property value that will result if nothing is done.
While every incremental step forward is worthwhile, the federal government's response must be stronger. It is clear that voluntary efforts to give distressed borrowers relief are being overwhelmed by new foreclosures and that more than what was announced today must be done, quickly.
For more information: Kathleen Day at(202) 349-1871 or email@example.com; Sharon Reuss at (919) 313-8527 or firstname.lastname@example.org; or Ginna Green at (510) 379-5513 or email@example.com.