Federal Regulators, Lenders and Wall Street Blamed for Worsening Housing and Mortgage Crisis

JUPITER, Fla., July 19 /PRNewswire-USNewswire/ -- 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 today to the Federal Reserve by Weiss Research, Inc., an 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 played an
       important role in further inflating the housing bubble that's at the
       root of the current crisis.

    -- Rather than accept 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.

    -- 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," writes 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."

63 Banks and Thrifts Named as Among the Most Vulnerable

It is often believed that loan losses and defaults have been limited to companies specializing in higher-risk, or subprime, mortgages.

Larson takes issue with that notion, 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," says Larson.

Nine Proposals for a Long-Term Recovery

With the goal of avoiding quick fixes and fostering a healthy, long-term recovery, Weiss Research offers the following proposals to federal regulators and legislators:

  1.  Closer monitoring and prompter 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 (OTS) 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.

Larson concludes: "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."

Note to Editors: Weiss Research's white paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" (http://www.weissgroupinc.com/whitepaper1) 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 [Docket No. OP-1288].

Weiss Research is an independent investment research firm that provides information and tools to help investors make sounder financial decisions. Mike Larson, Weiss Research's interest rate and real estate analyst, is the associate editor of the company's monthly publication, Safe Money Report, as well as a regular contributor to its daily newsletter, Money and Markets.