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October 2008
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In the wake of the recent financial bail-out, federal regulators told Congress that they are working on a plan that would help some of the distressed homeowners prevent foreclosure.  After the mortgage lending debacle became a global financial crisis, Congress called on former Federal Reserve Chairman Alan Greenspan to discuss his role with the foreclosure crisis.  Greenspan quickly warned that it will likely get worse before it gets better.

Greenspan called the banking and housing chaos a “once-in-a-century credit tsunami” that led to a breakdown in how the free market system functions. Accused of contributing to the meltdown, but denying that it was his fault, Greenspan told a House panel the crisis left him — an unabashed free-market advocate — in a “state of shocked disbelief.” The longtime Fed chief acknowledged under questioning that he had made a “mistake” in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions. Greenspan called it “a flaw in the model that I perceived is the critical functioning structure that defines how the world works.” His much-anticipated appearance came as committees in both the House and the Senate held competing hearings on the financial crisis. At one such forum, a senior Treasury official said the Bush administration intends to get a program to help struggling homeowners revise mortgages up and running soon.

The U.S. government’s $700 billion financial rescue effort, told the Senate Banking Committee that the new plan could include setting standards for restructuring mortgage loans that makes them affordable to the homeowner while providing a guarantee to banks that follow the foreclosure prevention procedures. According to Neel Kashkari, who is overseeing the government’s $700 billion financial rescue, “We are passionate about doing everything we can to avoid preventable foreclosures,” he said.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., told the same Senate panel that the government needs to do more to help tens of thousands of home borrowers avert foreclosure, including setting standards for modifying mortgages into more affordable FHA mortgage loans and providing loan guarantees to banks and other mortgage services that meet them. “Loan guarantees could be used as an incentive for servicers to modify loans,” Bair said. “By doing so, unaffordable home loans could be converted into loans that are sustainable over the long term.” Emergency Economic Stabilization Bill provided a new provision for mortgage lenders to help homeowners avoid foreclosure with a mortgage loan modification agreement. FHA continues to promote sensible loans featuring fixed rate terms and flexible credit guidelines that encourage homeowners to refinance rather than lose their homes to foreclosure. The FDIC is working “closely and creatively” with the Treasury Department on such a plan, she said.

Greenspan told the House Oversight Committee he was wrong in believing that banking institutions would be more prudent in their mortgage lending practices because of the need to protect their stockholders. Greenspan, who stepped down in February 2006 after serving as Fed chairman for 18 1/2 years, was asked to explain and elaborate his role regarding the sub-prime mortgage crisis. Some critics have blamed him for contributing to the problem by leaving interest rates too low for too long and for failing to regulate risky banking practices. Committee Chairman Henry Waxman, D-Calif., suggested that Greenspan contributed to “irresponsible lending practices” by rejecting appeals that the Fed intervene to regulate a surging subprime mortgage industry. “The list of regulatory mistakes and misjudgments is long,” Waxman said of oversight by the Fed and other federal regulators. “My question for you is simple,” Waxman told Greenspan. “Were you wrong?” “Well, partially,” Greenspan said. But he went on to assign the blame on soaring home loan foreclosures on overeager investors who did not properly take into account the threats that would be posed once housing sector stopped its unprecedented upward trend. 

Committee members accused existing and former regulators for not doing more to stop abusive predatory and risky lending practices. Christopher Cox, chairman of the Securities and Exchange Commission, acknowledged to the House panel that “somewhere in this terrible mess, laws were broken.” He said the government was doing the best it could to identify and pursue individuals and companies that broke the law.

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