WASHINGTON – Economic policymakers on Thursday recommended stricter regulation of mortgage lenders as part of a broad effort to prevent a repeat of a credit crisis threatening to drive the country into recession.
With problems in the credit and housing markets worsening, the Bush administration now seems to favor a larger role for government — an approach Republicans generally have had little appetite for.
Recommendations from a presidential advisory group on financial markets cover mortgage lenders and other institutions, as well as investors, credit ratings agencies and regulators.
Treasury Secretary Henry Paulson, who leads that group, said the effort is not about “finding excuses and scapegoats.” The suggested actions, he said, are intended to avoid another meltdown in the credit and housing markets.
“The objective here is to get the balance right — regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it,” Paulson said.
Federal and state regulators should strengthen oversight of mortgage lenders, according to the group’s report released Thursday. Also, states should follow strong, uniform licensing standards for mortgage brokers. No such nationwide system exists, although legislation in Congress would create one.
Sen. Charles Schumer, D-N.Y., said administration officials are “beginning to put their toe in the water when it comes to government involvement to help the economy. The bad news is they’re going to have to do a lot more than that to address the problem.”
Other recommendations urge improvements by credit rating agencies, criticized for not accurately assessing risk on complex mortgage investments. These kinds of business transactions soured, causing market chaos. The report also suggests clearer disclosures and assessments of risks on investments.
Greg McBride, senior financial analyst at Bankrate.com, likened the recommendations to “putting up a traffic light only after a series of auto accidents.”
“It is purely reactionary,” he said. “The ideas themselves are not necessarily new but the pressure to do something is growing as housing problems become more pronounced.”
The housing and credit woes have shaken Wall Street, propelled home foreclosures to record highs and forced financial companies to absorb multibillion losses on bad investments in mortgage-backed securities. For the first time since 2001, recession is a serious threat.
Federal Reserve Chairman Ben Bernanke said the proposals are “an appropriate and effective response to the deficiencies in our financial framework that contributed to the current turmoil in financial markets.” The central bank chairman serves on the advisory group, created after the 1987 Wall Street crash to monitor markets, as do the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Paulson said in a speech at the National Press Club that the report “is not about finding excuses and scapegoats. Those who committed fraud or wrongdoing have contributed to the current problems; authorities need to, and are prosecuting them. But poor judgment and poor market practices led to mistakes by all participants.”
