NYTimes: A Hands-Off Policy on Mortgage Loans

The NYTimes is reporting that despite reccomendations from federal bank regulators to mortgage lenders to increase standards, there has been almost zero change.

"For two months now, federal banking regulators have signaled their discomfort about the explosive rise in risky mortgage loans."

First they issued new "guidance" to banks about home-equity loans, warning against letting homeowners borrow too much against their houses. Then they expressed worry about the surge in no-money-down mortgages, interest-only loans and "liar's loans" that require no proof of a borrower's income.

So has there been any changes?

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."

Why are the federal reserve board reluctant to do anything about the housing bubble?

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."

Also, Greenspan at least publicly denies there is a significant housing bubble. Just some 'froth' in certain markets. The article continues:

The main issue for regulators is whether banks and other lenders are properly managing their own risk, and the lenders are looking good.

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.

However, "consumers - and perhaps the broader economy - are taking on more risk. About 60 percent of mortgages last year had adjustable interest rates, many with artificially low teaser rates that expire after the first few years. If a mortgage rate jumps from 4 percent to 6 percent, just slightly above current levels, the monthly payment can jump by roughly 30 percent when the teaser rates come to an end."

The volume of subprime mortgages has soared from about $35 billion in 1994 to about $530 billion in 2004 - more than 20 percent of all new mortgages last year. That growth helped propel the homeownership rate to a record 69 percent in 2004. The foreclosure rate on subprime mortgages remains modest, only 3.5 percent in the first quarter of 2005, but that is nine times the rate for prime borrowers.

Finally, one bank regulator states "When I started out, the biggest complaints were about denial of credit. Today, none of our complaints are about denial of credit. They are all about what happened after the credit was given." Easy credit, is way too nice of a term for irresponsible credit.