What really sparked the mortgage meltdown of the last few years?
And what does it say when some of the people working to fix the resulting crisis can’t quite agree on the exact causes?
On Monday, Sheila Bair, chair of the Federal Deposit Insurance Corporation, and Federal Reserve chair Ben Bernanke both spoke at an Arlington, VA conference on the mortgage meltdown.
Here’s a portion of Bair’s speech, where she talks about the roots of the crisis:
“At the height of the housing bubble, private mortgage-backed securitization devolved into an anything-goes bazaar where brokers and lenders kept lowering standards, while underwriters, issuers, and ratings agencies kept dreaming up new ways to package these risky loans into highly rated securities that belied the underlying risks. In a bid to recapture market share, the [government-sponsored enterprises, like Fannie Mae] lowered their underwriting standards, following the private-label mortgage market into large purchases and guarantees of poorly underwritten loans.”
If you’re looking for a crisp, one-paragraph summary of the mortgage market explosion at the root of the Great Recession, you’ve found it in the above excerpt from Bair’s speech.
The phrase “anything-goes bazaar” is both inspired and fitting. It’s a real shame that no MSM reporters who covered Bair’s remarks yesterday highlighted it in their articles – it deserves wide circulation and repetition. “Anything-goes bazaar” exactly summarizes the frenzied trading of toxic mortgage-backed securities that finally came to a screeching halt and caused trillions of dollars of losses.
This paragraph from Sheila Bair’s speech deserves wide circulation for another reason. It reminds us of the economic actors that bear the most responsibility for the mortgage meltdown – brokers, lenders, underwriters, issuers, ratings agencies and government-sponsored enterprises.
There’s another culpable actor in the mortgage meltdown that doesn’t appear in this list, that Bair mentioned earlier in her speech – “regulators.” Like the actors listed above, she says, regulators paid “insufficient attention” to “both safety and soundness [of mortgages and related financial products] and basic consumer protection.”
“With each of these parties acting in its own best interest, the system as a whole lurched toward disaster.”
Indeed.
Now, here’s Ben Bernanke at the same Arlington conference, talking about the same subject:
“It was ultimately very destructive when, in the early part of this decade, dubious underwriting practices and mortgage products inappropriate for many borrowers became more common. In time, these practices and products contributed to problems in the broader financial services industry and helped spark a foreclosure crisis marked by a tremendous upheaval in housing markets.”
While this is also an accurate summary of the meltdown, Bernanke doesn’t get nearly specific enough.
Bernanke admits underwriting standards slipped, but doesn’t say who allowed this to happen. He talks about “inappropriate” mortgage products being offered to consumers, but doesn’t say who sold them or how they came on the market. He acknowledges the pain caused by the crisis, but won’t assign responsibility.
Bernanke may just have had an off day. Not too long ago, on September 24th, he gave a speech where he gave a more Sheila Bair-esque view of the mortgage crisis’ root causes.
Given a choice between Bair’s willingness to rattle Wall Street cages, and Bernanke’s apparent desire to avoid doing so, I know which approach I prefer. And I have a feeling most people will come down on the side of more cage-rattling for the time being, until more of the rascals responsible for the mortgage meltdown receive their just deserts – including jail time.
