Mortgage Informer

Bush administration ignored warnings of sketchy lending practices on home loans.

Only time will tell how the Bush administration will be remembered, but a new report by The Associated Press could leave a lingering black mark on the presidency.

The report details how the administration failed to act on warnings about sketchy lending practices by some financial institutions. Those practices — primarily granting mortgages with no downpayment, often to home buyers without jobs or any apparent ability to repay the loans — later played a key role in sending the economy into its current tailspin.

The AP reported that as early as 2005, the administration was already seeing red flags related to mortgage lending.

That year, bank regulators proposed a crackdown on banks granting risky loans. The plan included:

• A requirement for banks to boost their efforts to verify that applicants for mortgages were employed and could afford the houses they were seeking to buy.

• Capping the number of risky mortgages, which would prevent a chain reaction from defaults.

• Urging banks to encourage prospective home buyers to make responsible decisions — in essence, not to buy homes that were beyond their means. Regulators also wanted to urge banks to do a better job of explaining to loan applicants that interest rates could rise sharply and result in ballooning payments.

The Bush administration chose not to adopt those recommendations, instead bowing to lobbyists for major financial institutions and accepting assurances from the banks themselves that the lending practices weren’t a problem.

“These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages,” David Schneider, home loan president of Washington Mutual, said to federal regulators in early 2006.

Just two years after Schneider made that statement, WaMu became the largest bank failure in U.S. history.

But back when the mortgage industry was dealing out high-risk mortgages like hands of gin rummy, major financial institutions would have nothing to do with efforts to slow them down.

They even bucked concerns among federal regulators about a type of mortgage featuring payments so low that the mortgage debt actually increases every month. Furthermore, they fought efforts to rein in a problem that many banks now cite as a major contributor to the housing crisis.

That proposed regulation involved mortgages banks purchase from brokers. Regulators sought to require banks to verify that borrowers who obtained such mortgages could actually afford their homes, but major banks said in 2006 the requirement wasn’t necessary.

All the while, bankers said government intervention would squelch innovations that would keep any problems in check.

Bush bought it, opting to put his trust in the open market system.

Well, we all know what happened. The housing bubble burst, borrowers began defaulting and the economy began melting down.

There’s no guarantee the crisis could have been avoided if the Bush administration would have adopted the regulations proposed in ‘05.

But in hindsight, it’s hard to see how the regulations could have hurt.

And that’s something that Americans who lost huge chunks of their retirement savings and other investments in the wake of the financial crisis aren’t likely to forget.

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Tags: mortgage crisis