Page 45 - untitled

 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

quality of the firms’ due diligence; otherwise, she said, serious questions could arise
about whether they could be forced to buy back bad loans that they had made or
securitized. 
Maker told the board that she feared an “enormous economic impact” could re-
sult from a confluence of financial events: flat or declining incomes, a housing bub-
ble, and fraudulent loans with overstated values. 
In an interview with the FCIC, Maker said that Fed officials seemed impervious to
what the consumer advocates were saying. The Fed governors politely listened and
said little, she recalled. “They had their economic models, and their economic mod-
els did not see this coming,” she said. “We kept getting back, ‘This is all anecdotal.’” 
Soon nontraditional mortgages were crowding other kinds of products out of the
market in many parts of the country. More mortgage borrowers nationwide took out
interest-only loans, and the trend was far more pronounced on the West and East

Coasts. Because of their easy credit terms, nontraditional loans enabled borrowers
to buy more expensive homes and ratchet up the prices in bidding wars. The loans
were also riskier, however, and a pattern of higher foreclosure rates frequently ap-
peared soon after.
As home prices shot up in much of the country, many observers began to wonder
if the country was witnessing a housing bubble. On June , , the Economist
magazine’s cover story posited that the day of reckoning was at hand, with the head-
line “House Prices: After the Fall.” The illustration depicted a brick plummeting out
of the sky. “It is not going to be pretty,” the article declared. “How the current housing
boom ends could decide the course of the entire world economy over the next few
years.” 
That same month, Fed Chairman Greenspan acknowledged the issue, telling the
Joint Economic Committee of the U.S. Congress that “the apparent froth in housing
markets may have spilled over into the mortgage markets.”  For years, he had
warned that Fannie Mae and Freddie Mac, bolstered by investors’ belief that these in-
stitutions had the backing of the U.S. government, were growing so large, with so lit-
tle oversight, that they were creating systemic risks for the financial system. Still, he
reassured legislators that the U.S. economy was on a “reasonably firm footing” and
that the financial system would be resilient if the housing market turned sour.
“The dramatic increase in the prevalence of interest-only loans, as well as the in-
troduction of other relatively exotic forms of adjustable rate mortgages, are develop-
ments of particular concern,” he testified in June.

To be sure, these financing vehicles have their appropriate uses. But to
the extent that some households may be employing these instruments to
purchase a home that would otherwise be unaffordable, their use is be-
ginning to add to the pressures in the marketplace. . . .
Although we certainly cannot rule out home price declines, espe-
cially in some local markets, these declines, were they to occur, likely
would not have substantial macroeconomic implications. Nationwide
banking and widespread securitization of mortgages makes it less likely