More than a year after Alan Greenspan warned of the “potential for individual disaster” from a new breed of mortgages that were helping to fuel the housing boom, federal regulators finally are trying to do something about it.
On Friday, in a jointly crafted message on so-called exotic mortgages, multiple government agencies warned banks in strong terms to make sure borrowers can pay back the full amount of what they borrow and that homeowners know that a low monthly payment today could be shockingly high later.
America’s real-estate boom may be over now, but millions of homeowners who thought they were borrowing their way into wealth find themselves instead holding a ticking time bomb, a toxic mortgage with a potential payment far larger than they can afford.
Bank regulators knew more than a year ago that lenders were aggressively marketing interest-only and payment-option adjustable-rate mortgages to consumers who didn’t fully understand what they were buying. In July 2005, several government agencies teamed up to write guidelines intended to set lenders straight.
In the meantime, the runaway writing of these mortgages went on unchecked, and the fact that nobody in government stood in the way highlights the fact that a patchwork of government bureaucracies was ill-equipped to bring the practice under control, lawmakers and regulators say.
The housing credit bubble led to the growth of exotic loans, which, in a vicious spiral, drove prices even higher, said one observer. In a bubble, “the financing gets progressively worse. At the end, you get nuttiness,” said Dean Baker, an economist for the Center for Economic and Policy Research, a Washington think tank.
Finally, prices got so high that “the only way people could buy houses was by bending the rules,” said Baker, who’s been warning about the real-estate bubble for years.
In the Orwellian parlance of the mortgage industry, loans that ignore the true ability of the borrower to pay for the loan are called “affordability”