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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
country. Edward Sivak, the director of policy and evaluation at the Enterprise Corp.
of the Delta, in Jackson, Mississippi, spoke of being told by mortgage brokers that
property values were being inflated to maximize profit for real estate appraisers and
loan originators. Alan White, the supervising attorney at Community Legal Services
in Philadelphia, reported a “huge surge in foreclosures,” noting that up to half of the
borrowers he was seeing with troubled loans had been overcharged and given high-
interest rate mortgages when their credit had qualified them for lower-cost loans.
Hattie B. Dorsey, the president and chief executive officer of Atlanta Neighborhood
Development, said she worried that houses were being flipped back and forth so
much that the result would be neighborhood “decay.” Carolyn Carter of the National
Consumer Law Center in Massachusetts urged the Fed to use its regulatory authority
to “prohibit abuses in the mortgage market.”
The balance was tipping. According to Siddique, before Greenspan left his post as
Fed chairman in January , he had indicated his willingness to accept the guid-
ance. Ferguson worked with the Fed board and the regional Fed presidents to get it
done. Bies supported it, and Bernanke did as well.
More than a year after the OCC had began discussing the guidance, and after the
housing market had peaked, it was issued in September as an interagency warn-
ing that affected banks, thrifts, and credit unions nationwide. Dozens of states fol-
lowed, directing their versions of the guidance to tens of thousands of state-chartered
lenders and mortgage brokers.
Then, in July , long after the risky, nontraditional mortgage market had dis-
appeared and the Wall Street mortgage securitization machine had ground to a halt,
the Federal Reserve finally adopted new rules under HOEPA to curb the abuses
about which consumer groups had raised red flags for years—including a require-
ment that borrowers have the ability to repay loans made to them.
By that time, however, the damage had been done. The total value of mortgage-
backed securities issued between and reached . trillion. There was a
mountain of problematic securities, debt, and derivatives resting on real estate assets
that were far less secure than they were thought to have been.
Just as Bernanke thought the spillovers from a housing market crash would be
contained, so too policymakers, regulators, and financial executives did not under-
stand how dangerously exposed major firms and markets had become to the poten-
tial contagion from these risky financial instruments. As the housing market began
to turn, they scrambled to understand the rapid deterioration in the financial system
and respond as losses in one part of that system would ricochet to others.
By the end of , most of the subprime lenders had failed or been acquired, in-
cluding New Century Financial, Ameriquest, and American Home Mortgage. In Jan-
uary , Bank of America announced it would acquire the ailing lender
Countrywide. It soon became clear that risk—rather than being diversified across the
financial system, as had been thought—was concentrated at the largest financial
firms. Bear Stearns, laden with risky mortgage assets and dependent on fickle short-
term lending, was bought by JP Morgan with government assistance in the spring.
