Subprime History

Now that there’s a lot of revisionist history being peddled, I thought it would be interesting to go back in time a bit and see what our attitude was toward subprime mortgages back in the heat of the housing bubble. I took a look at some NYTimes articles from 2005. Here’s one that popped out in particular:

“It’s as easy to get these loans now as it was two months ago,” said Michael Menatian, president of Sanborn Mortgage, a mortgage broker in West Hartford, Conn. “If anything, people are offering them even more than before.”

The reason is that federal banking regulators, from the Federal Reserve to the Office of the Comptroller of the Currency, have been reluctant to back up their words with specific actions. For even as they urge caution, officials here are loath to stand in the way of new methods of extending credit.

“We don’t want to stifle financial innovation,” said Steve Fritts, associate director for risk management policy at the Federal Deposit Insurance Corporation. “We have the most vibrant housing and housing-finance market in the world, and there is a lot of innovation. Normally, we think that if consumers have a lot of choice, that’s a good thing.”

At the Federal Reserve, officials face issues similar to those posed by the stock market bubble of the late 1990’s. Alan Greenspan, the chairman of the Federal Reserve, warned about “irrational exuberance” in the stock market but did not try to pop the bubble.

Today, Mr. Greenspan acknowledges that housing prices in some areas are “frothy,” but he and other top regulators do not think it is their job to push them back down.

Frothy, eh? And note that quote from the guy at the FDIC, the agency that at the time was neglecting to collect the feeds it was owed from banks to stockpile its reserves. Of course, it should all work out okay because the banks today are much stronger than they were in the past, right?

They have hedged their risks by bundling mortgages into securities that are then sold to investors around the world. And if interest rates go higher, they have shifted much of the risk onto consumers because a growing share of home buyers have taken on adjustable-rate mortgages. At the same time, they have built sturdier financial institutions through mergers and the breakdown of barriers to interstate banking.

Bert Ely, an independent banking analyst who was among the first to recognize the crisis at savings and loan institutions in the 1980’s, said the banks are far sounder today. “It’s a night-and-day difference,” Mr. Ely said. “No comparison.”

Yeah, no way this thing gets as bad as the S&L crisis.

On the other hand, Barney Frank actually comes out looking pretty good:

Indeed, because the main risks are to consumers rather than to financial institutions, some critics say regulators have been too timid. “The prevailing attitude is that if you’re taking on a risky mortgage, you’re an adult and you’re taking on the risk yourself,” said Representative Barney Frank, Democrat of Massachusetts and a co-sponsor of a bill that would impose tougher rules against so-called predatory lending practices.

“If you are the comptroller of the currency or the Federal Reserve, you’re looking out for the system of the world,” Mr. Frank added. “You’re making macroeconomic policy. It’s much more fun than looking out for consumers.”

Oh, and in case you were wondering what happened to Adam and Sunny Gardner, the lovely couple from Reno with the 3BR/2BA. Looks like they were stuck holding the bag, at least as of 2007 anyway.

Fascinating stuff.