Foreclosure Crisis: Some Blaming Greenspan For Foreclosure Crisis

Posted on December 13th, 2007 by saman

The California State Assembly Banking & Finance Committee has pointed a finger of accusation in the direction of former Federal Reserve chairman Alan Greenspan’s policies as having contributed significantlyw to the current foreclosure crisis. The committee says that we are only at the beginning of the fast-growing mortgage meltdown that began with three of Mr. Greenspan’s decisions.

The first Greenspan decision now under scrutiny was his reduction of the federal fund rate to only 1% in 2003 and his refusal to raise it back up for a full year. The committee says that this spawned the conditions that gave rise to rampant investor speculation plus a loosening of the standards for loan underwriting that sent lenders wildly competing for a share of this market,

Second, they also blame the ex-chairman for avoiding increased regulations despite the fact that he admitted knowing about mortgage loan abuses. This, they say, resulted in an across-the-board use of mass foreclosures that is an extremely inefficient process. Now there is a skyrocketing human toll to families who lost their homes and are now out on the street, plus a huge cost to society in general, with lenders losing up to half of the loan value on each home foreclosed.

Thirdly, it has been said that Greenspan was blinded by rapidly rising home prices which led him to promote the non-traditional sub prime adjustable rate mortgages that were disasterous to so many American homeowners. As an example, Mr. Greenspan gave a speech in late February, 2004, where he stated that consumers were paying too much for fixed-rate mortgages. He asked lenders to supply borrowers with “greater mortgage alternatives to the conventional fixed-rate loans.” The committee added that when a leader with status like Mr. Greenspans promotes these alternatives, both lenders and borrowers listen. We know now what the result was.

What followed was that Wall Street heeded Greenspan’s recommendations and designed a wide range of very-risky alternative ARMs including those with low “teaser” interest rates followed two years later by much higher resets. The risky loans were then sold—and often fraudulently—to a poorly informed public that was unaware of the risks. At the same time, the loose regulatory system permitted mortgage brokers to receive attractive financial incentives to convince borrowers to get into these higher-rate adjustable rate sub prime loans even though many could have qualified for fixed-rate mortgages.

According to the California committee, both the state and the nation are now ailing from the consequences of Greenspan’s policies as hundreds of thousands of mortgages spiked upwards this year and forced borrowers who could not make their higher payments into foreclosure. And while a portion of these homeowners could have saved their homes through refinancing, they were stopped from doing so by the big prepayment penalties.

While President Bush’s recent plan would help a small percentage (approximately 7%) to avoid future foreclosure, many feel that it just doesn’t go far enough. And for all those who already are homeless due to foreclosure, there appears little if anything that state or federal authorities can do!