Don’t take the punchbowl away

From the Baltimore Sun:

Failure to regulate non-bank lenders helped cause subprime mess

Anyone looking to point a finger of blame for the meltdown in the subprime mortgage market may need more than two hands. It took the action, and the inaction, of many players to produce today’s mess, which threatens to slow the U.S. economy further.

“Everyone has a share in the blame – lenders, borrowers, regulators, investors. There were a lot of mistakes, and everyone made them,” said Mark M. Zandi, the chief economist for Moody’s Economy.com, a consultant in West Chester, Pa.

The federal government might be considered to have failed most of all. It shirked its responsibility to regulate this critical area of home finance – much as it had during the savings-and-loan crisis of the 1980s.

At least nine federal agencies oversee some portion of the mortgage market, and over the past three years nearly all of them issued warnings about risky loan terms.

But not one of them – or Congress – moved to regulate non-bank lenders and mortgage brokers. Both fall through the cracks of direct federal regulation.

Together, they originate more than half of all subprime loans to borrowers with weak credit histories, according to the Federal Reserve.

They also account for 80 percent of the adjustable-rate, subprime mortgages that are the heart of today’s problems.

Why didn’t regulators act more forcefully?

When times are good, regulators are wary of taking away the punch bowl. During the housing boom of 2001-2005, President Bush talked up soaring home sales to promote his vision of an “ownership society.”