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

For Immediate Release:
Contact: Joy Howell: 202/828-7838
Linda Paris: 202-365-3343
Pam Reimer: 608-434-2918
Thursday, July 19, 2007 (broadcast)

Federal Regulators, Lenders and Wall Street Blamed for Worsening Housing and Mortgage Crisis
Investment Research Firm Offers Nine Proposals for Recovery

JUPITER, Florida, July 19, 2007 — Lax federal regulators and aggressive 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

Severe loan losses and defaults have afflicted many lenders. The losses are often believed to be limited strictly 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 it appears the mortgage crisis may not be 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:

  • Better monitoring and prompter action by the Federal Reserve to help avert run-away asset price inflation.
  • Better enforcement of existing predatory lending statutes.
  • 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.
  • Greater focus by regulators on banks and thrifts whose mortgage performance measures are showing the most stress.
  • Suitability requirements for the mortgage lending industry.
  • Restrict, but do not ban, specific lending practices.
  • Federal training, education, licensing, and testing standards for mortgage lenders.
  • Assignee liability for secondary market buyers of home loans should be seriously considered.
  • More focus on developing programs that promote saving for a down payment.

"These solutions cannot be painless," says Larson, "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."

Weiss Research is an independent investment research firm that provides information and tools to help investors make sound financial decisions. The firm's flagship publication, Money and Markets, is a daily investment newsletter offering the latest news and financial insights for the stock market. The company also publishes Martin Weiss' Safe Money Report, Larry Edelson's Real Wealth Report and other financial newsletters focused on international investing, natural resources and dividend stocks.

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].

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.