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Research Firm Blames Regulators, Lenders and Wall Street for Crisis
By James Comtois
Federal regulators and mortgage lenders were largely responsible for a housing and mortgage crisis that's likely to worsen, according to a white paper submitted to the Federal Reserve by Weiss Research Inc., an independent investment research firm.
The report's author, interest rate and real estate analyst Mike Larson, demonstrates that, rather than act as a moderating force, the Federal Reserve has played an important role in further inflating the housing bubble that's at the root of the current crisis. Additionally, instead of accepting a decline in lending volume as homes became less affordable, lenders debased their standards and incurred the risk of serious long-term damage to their finances, the industry and ultimately the economy.
Weiss Research's white paper also asserts that Wall Street's large-scale transformation of mortgages into securities significantly boosted risk-taking.
"For many Americans, the dream of home ownership is turning into a nightmare," said Mr. Larson. "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."
It is often believed that loan losses and defaults have been limited to companies specializing in higher-risk, or subprime, mortgages. Mr. Larson argues the contrary, naming 63 traditional banks and thrifts that may be especially vulnerable to the crisis, based on high ratios of nonperforming mortgage loans.
"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," he said.
With the goal of avoiding quick fixes and fostering a healthy, long-term recovery, Weiss Research offers the following nine proposals to federal regulators and legislators:
1. Close monitoring and prompt action by the Federal Reserve to help avert run-away asset price inflation.
2. Better enforcement of existing predatory lending statutes.
3. Better protection of borrowers through a model akin to one recently established between the Office of Thrift Supervision and three subsidiaries of American International Group.
4. Greater focus by regulators on banks and thrifts whose mortgage performance measures are showing the most stress.
5. Suitability requirements for the mortgage lending industry.
6. Rather than a ban on special-purpose mortgages, procedures to limit them to the uniquely qualified borrowers for which they were originally designed.
7. Federal training, education, licensing, and testing standards for mortgage lenders.
8. Assignee liability for secondary market buyers of home loans.
9. More focus on developing programs that promote saving for a down payment.
"These solutions cannot be painless. But 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," according to Mr. Larson.
Weiss Research's white paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery," was submitted to the Federal Reserve on July 19, in response to the Federal Reserve's request for commentary on the home equity lending market and the adequacy of existing regulatory and legislative provisions in protecting the interests of consumers.
Those interested in reading the entire white paper can visit http://www.weissgroupinc.com/whitepaper1.
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