Ben Bernanke, whose term as Fed chairman is likely to be extended soon by the U.S. Senate, was in Atlanta over the weekend to speak at the annual meeting of the American Economic Association. His topic: How did we get in this mess?
As the AJC’s Mike Kanell reports, Bernanke put most of the blame on the exotic loan products that mortgage lenders invented to put hundreds of thousands and perhaps millions of people into homes that they could not afford, and on the failure of federal regulators to intervene:
“Borrowers picked and were permitted mortgages that no one expected them to service long term, (Bernanke) said: Everyone involved believed that home prices would only keep rising.
“This description suggests that regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices.”
The chart below from Bernanke’s presentation offers pretty stark evidence for that claim. It documents the rising percentage of various alternative-rate mortgages (ARMs) closed during the buildup of the real-estate bubble. A negative amortization loan, for example, allowed the borrower to pay less each month than the interest he or she was being charged, meaning they were paying nothing toward the principle and were actually getting deeper into debt each month. The assumption, of course, was that it didnt’ matter because they could always sell that house for a lot more than its purchase price. Pay-option loans — sometimes called “Pick-a-payment” loans — allow borrowers to set how much they initially pay in monthly house payments. By 2006, those accounted for a huge percentage of ARMs.
Let me also note — because you know we’re going to hear it — that like most economists, conservative or liberal, Bernanke does not try to blame the collapse on the Community Reinvestment Act, which encouraged banks that took deposits from poorer neighborhoods to also make loans in those neighborhoods. That explanation fits the emotional need in some quarters to blame all this on poor people, but it fits none of the facts.
Most of the bizarre loans documented in Bernanke’s chart were made by institutions and lenders not affected by the CRA. CRA-regulated institutions — standard full-service banks with local branches — were also more likely to keep the loans they did make, meaning that they did not shuffle off the risk to Wall Street and thus were less likely to offer low-documentation or no-documentation loans. Those traditional banks still had their own skin in the game, and thus monitored the risk more closely.