Housing Bubble Bust

Bloomberg.com

In March, Countrywide Financial Corp., the biggest U.S. mortgage provider, stopped taking applications for no-money-down loans from risky borrowers without proof of income.

Question is, how'd it ever start doing that?

General Electric Co.'s WMC Mortgage said it would refuse mortgages to borrowers with credit scores below 600. Wells Fargo & Co., the largest U.S. subprime lender, said it changed standards effective Feb. 16 for some risky customers.

The Fed's Open Market Committee is still likely to keep its target rate for overnight loans between banks at 5.25 percent when it next meets June 27-28, according to the median forecast of economists surveyed by Bloomberg News.

Goldman Sachs Group Inc. Chief U.S. Economist Jan Hatzius today ditched his call for rate cuts this year, joining his counterpart David Rosenberg of Merrill Lynch & Co. yesterday.

Bernanke said in his speech he's open to imposing tougher regulation of lenders to prohibit ``unfair'' practices.

The Fed, which has authority to write rules for all lenders, is under pressure from Congress to further restrict predatory lending and toughen up standards. The Fed's Board of Governors in Washington will hold a public hearing on mortgage rules next week.

`Additional Measures'

``Combating bad lending practices, including deliberate fraud or abuse, may require additional measures,'' he said today. Still, the Fed must ``walk a fine line'' on regulation, Bernanke said, repeating remarks made in Chicago last month.

The Fed chief noted that he favors better disclosure and consumer education, and said regulators will continue to use supervisory guidance to remind lenders of standards.

``We have an obligation to prevent fraud and abusive lending,'' he said. ``We must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.''

Economists say Fed policies contributed to the housing boom and bust. Former Chairman Alan Greenspan, Bernanke -- at the time a Fed governor -- and others were concerned in 2003 that deflation could hit the U.S., as it did Japan for a seven-year period. They cut the key rate to 1 percent and held it there for a year.

`Measured' Pace

When they did raise rates, from June 2004, the Fed committed to a ``measured'' pace of a quarter percentage point per meeting. That helped ``hold down long-term interest rates,'' said Brian Sack, who as a Fed staff economist in 2004 helped Bernanke research the effect of communication on interest rates. Sack is now a vice president at Macroeconomic Advisers LLC in Washington.

As borrowing costs stayed low even as economic growth accelerated, home-buyers took on a record amount of mortgage debt. From 2004 to 2006, lenders wrote a $2.8 trillion in new home loans, unprecedented for any three-year period.

``The Fed was too easy for too long,'' said Ethan Harris, chief U.S. economist at Lehman Brothers and former New York Fed staff economist. The Fed's gradual pace of lifting rates ``contributed to the lack of bite from monetary policy.''

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net .

Last Updated: June 5, 2007 14:48 EDT