“We made a mistake in this society. We assumed that everybody can be a homeowner. That was wrong.
We ended up pushing people into home ownership – including a great many who weren’t ready for it.”
Question: How on earth did the U.S. mortgage market get here?
Answer: We had too little regulation at a point of great financial innovation. Twenty years ago, most loans were made by someone who expected to be paid back by the borrower. And lenders who want to be paid back by the borrower are careful about who they lend to.
Then came this great innovation called securitization. Securitization means that I lend you money and quickly sell the right to be paid back by you to other people. Well, when the lender ceased to have an ongoing relationship with the borrower, a tremendous amount of banking discipline was lost. And it was much harder to replace than we thought.
Q. Where were the regulators during all of this? Why didn’t they step in?
A. Back in 1994, Congress gave the Federal Reserve the authority to ban irresponsible mortgages. Alan Greenspan, as a very committed anti-regulation conservative, refused – literally refused – to use that authority. Congress can give people authority; we can’t compel them to use it.
Ben Bernanke, to his credit, realized that it was time to use that authority. So he promulgated a set of rules on July 14 of this year to prohibit a lot of the mortgages of the type that got us in trouble. If Alan Greenspan had done 10 years ago what Ben Bernanke did this past July, we would have much less of a problem in subprime mortgages.
Q. Is the current mess a result of naive consumers being duped into horrible mortgages or is it a case of greedy consumers chasing cheap loans?
A. Some were misled, others took part in the deception. There were people, for instance, who lied about their incomes.
But we have made a mistake in this society. The assumption that everybody can be a homeowner is wrong. We pushed and encouraged people into home ownership – people who, in some cases, weren’t ready for it. You can’t act on wishes that are unrealistic without having negative consequences.
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