Was there no regulatory authority in the USA to ensure sub-prime mortgages didn't get out of control?

Question

Was there no regulatory authority in the USA to ensure sub-prime mortgages didn't get out of control?

Answer 1

No there is not as US Corporations are individual human beings according to the law. Any attempt to regulate them gets lawyers yelling about self expression and freedom of speech for the company, they always win as well.

Answer 2

I believe they have the Federal Reserve which is, *in theory*, meant to act as a regulatory body in the USA.

However, I don't believe they are as pro-active as the FSA here in the UK.

Answer 3

In theory the Federal Reserve could have done something.  Historically, they didn't worry too much about the mortgage industry.  They cared about Wall Street and the "exciting" parts of the investment world.

Mortgages were so boring.  A local bank would pay depositors 4% interest on a savings deposit and loan that money out for 30 years at 6%.   They made a small profit every month for 30 years.  Tiny profits, no danger, very boring.

Then , all of a sudden, it wasn't boring any more.  But the Federal Reserve wasn't even looking.

Answer 4

Obviously not.

Answer 5

To understand the answer, you need to understand first the players involved in the sub-prime mortgage origination. Typically mortgage loan originators are not deposit banks like BOA or CITI and hence are not regulated by the Fed. Now, how do subprime mtge originators fund their loans to the home buyers then? They work with wall street dealers like UBS, Bear Stern and Lehman etc, to package the loans into securities and have the dealers sell the securities to the broad investment communities. Since the loans are issued into multi-tranch securities with different credit rating, the highest rated securities will be sold to banks, and lower rated securities will be sold to hedge funds or packed into CDO's, another type of packed security. The dealers are obviously regulated by the SEC, but SEC can only catch them if they violated risk disclosure rules which they did not. So as long as the investment community is buying the subprime securities from the dealer, mortgage originators will have the money to lend to subprime home buyers. Because subprime loans have higher interest rate, the securities also bear higher yield compared to there securities available in the past few years when the US interest rate was very low. As a result, there has been a hugh demand for the subprime securities by the investor community. That further caused easy financing for subprime borrowers

Back to your question, it is bit like asking: was there no regulatory control over the terrible dotcom stock bubble before 2000? You see, subprime was a bubble, not much different from the dotcom, which was created by excess demand. The difference from the dotcom is that for subprime, the excess demand came from institutional investors who you thought should have more investment intelligence. I also personally believe that rating agencies should shoulder hugh responsibilities for the subprime demand bubble because they blindly issued high credit ratings to many of the unworthy subprime securities

Answer 6

The American government didn't have the balls to act to prevent the situation. It'll be fuel prices next.

Answer 7

why would there be, the american dream was happening, people were getting homes that before didn't qualify.  Everybody, borrower, lenders, the gov't and mortgage pros thought that properties would increase 10% every year and all would be well.  then add to the mix lenders and borrower's greed, lenders to make more money, borrower's to spend like they don't have to repay the loan and you have a very toxic situation.  Everyone wants to point a finger somewhere, well point in at yourself, your spouse, your local bank, your neighbor, everyone.  Currency had a point.  No one learned a d**n thing from the dot.com bubble, it's all about quick money and spending beyond one's means.  9 out of 10 of us is guilty here in some way, gov't regulation would not have helped, this needed to happen