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Paul Kiesel
Paul Kiesel
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FBI Predicted Mortgage Crisis, Observers See It as a “Gross Failure of Regulation”

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An FBI official, back in September, 2004, three years before the first wave of foreclosures hit the housing market, made a then chilling and portent observation: The booming mortgage business, fueled by loosely written loans and irresistible interest rate payment option loans, were starting to attract shady operators and billions in losses were possible: “It has the potential to be epidemic.”

The current damage from the first mortgage crash has more than matched the loses attributed to the savings-and-loan bailouts of the Reagan 80s and early 90s. The Los Angeles Times’ Richard B. Schmitt puts it like this, “By some estimates, it has made that costly debacle look like chump change.”

From a numbers standpoint, thus far, the mortgage crisis presents:

-$300 billion of mortgage-backed securities and other risky investments have been written down by banks and brokerages.

-In California alone, over $100 billion worth of homes have been foreclosed on in the last two years, at an average of 1,300 house everyday.

-$500 billion is expected to be loss in the next 18 months due to option-ARM loan defaults.

-The earliest we can expect a recovery, and this is a very optimistic prediction by most economists, is early 2010 — a year into the next presidency.

And it will be up to the next president to decide how to handle this crisis, as far as which people need to be in charge of its oversight (Treasury and Fed). Because, as the current administration had shown Americans (with Bush taking more vacation days than any other president in the history of the United States), lax policies and little oversight do not work when

Most observers have declared the mess a gross failure of regulation. To be sure, in the run-up to the crisis, market-oriented federal regulators bragged about their hands-off treatment of banks and other savings institutions and their executives. But it wasn’t just regulators who were looking the other way. The FBI and its parent agency, the Justice Department, are supposed to act as the cops on the beat for potentially illegal activities by bankers and others. But they were focused on national security and other priorities, and paid scant attention to white-collar crimes that may have contributed to the lending and securities debacle. (Los Angeles Times, 8/25/08)

Some think it’s too little too late to respond appropriately to the mortgage crisis now that the regulation problem is out in the open, however, once the economy rebounds, which it will, we need to put the proper rules in place to avoid this from happening in the future. Unfortunately, with most of the components of the housing bill not taking effect until October, we’ll have to wait for the next administration to clean up the credit mess of the last eight years and prevent Wall Street and Main Street from slipping back into its abyss.