The Federal Reserve's bailout of the subprime follies of financial institutions by cutting interest rates this week may help the industry continue, without due diligence, to roll the dice on unduly rosy outcomes.
But this is hardly likely, in the long run, to benefit the homeownership prospects of the 70% of Americans who live from paycheck to paycheck.
It would be far more preferable for Fed Chairman Ben Bernanke to organize an effort to solve the subprime mortgage crisis directly. One option would be to urge the financial industry — including Wall Street, which helped cause and profited from the crisis — to provide a direct, private bailout of nonspeculator victims.
The recent comments of former Fed Chairman Alan Greenspan regarding his lack of responsibility for the present foreclosure crisis will be debated for many years. From the perspective of low-income communities, many of us feel he was more than adequately warned of the crisis and offered solutions beginning in 2002.
For instance, in the spring of 2004, our institute brought together 15 financial institutions with Operation Hope (a Los Angeles nonprofit that provides economic tools and services) to discuss the potential foreclosure crisis and the danger of exotic adjustable-rate mortgages. The Federal Reserve Bank of San Francisco was a co-host and reported the community concerns to the Federal Reserve Board. These concerns centered particularly on Countrywide Financial Corp.'s model of offering over 150 exotic ARMs.
Soon thereafter, on June 23, 2004, our institute met in Washington with Mr. Greenspan and members of his senior staff who had been studying, at our request, exotic loans. Mr. Greenspan made two telling remarks at this meeting which clearly demonstrated his knowledge of the potential ramifications.
First, he stated in response to concerns about exotic ARMs: "These adjustable rates are confusing. Even if you have a PhD in math, you wouldn't be able to compare and determine which was best for you."
Mr. Greenspan also made a far more disturbing comment regarding adjustable rates at this sit-down. "I never had an adjustable-rate mortgage," he said. "I only get fixed rates, because I like certainty."
(Earlier that year, on Feb. 23, he had publicly extolled the virtues of ARMs for the average homeowner without any caveats or reservations.)
We also raised the foreclosure issue at subsequent meetings with Mr. Greenspan and sent him two articles we had written for this newspaper.
The first, published July 30, 2004, was entitled, "How Big Players (regulated financial institutions) Can Protect Public in Coming ARMs Race." The second, "ARMs Race Could Set Off a Wave of Foreclosures," was published May 13, 2005, and included recommendations to eliminate of negative amortization and teaser-rate instruments.
With this in mind, it is hard to accept, as Mr. Greenspan recently stated on "60 Minutes," that he "really didn't get it until very late in 2005 and 2006."
Mr. Greenspan also told "60 Minutes," in defense of the Fed's inaction, "It's very difficult for banking regulators to deal" with regulating bank actions.
Here again we would take exception. As early as 2002 our institute discussed the subprime crisis at length with Mr. Greenspan and offered a number of regulatory suggestions, consistent with his marketplace philosophy, that he declined to consider. Almost all these suggestions have now been adopted by the federal regulators and/or are a part of proposed mortgage legislation that could help avert future foreclosure crises.
At these Washington meetings (which generally occurred twice a year), we frequently urged Mr. Greenspan, one of the world's greatest proponents of free-market solutions, to implement a simple free-market solution: Convene the major subprime and prime institutions, and have them create a quasi-fiduciary high standard for all mortgage originations. Once that was in place and widely publicized and promoted by the regulators, even the unregulated would have a difficult time competing unless they met these high standards.
Unfortunately, other issues, such as tax cuts for the wealthy, were then more central to the Fed's agenda.
Since we greatly admire the former chairman's considerable skills, we wonder if the foreclosure crisis would have occurred if the issue was in the forefront of his numerous concerns.
What, for example, might have happened had the former chairman called Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc., and Countrywide, along with investment banks, such as Bear Stearns Cos. and Lehman Brothers, to the table in early 2004 to create a private and far less costly solution?
