Bad Credit Mortgage Regulations: Off Base?
The Federal Reserve Bank of St. Louis President says investors who lost money on bad credit mortgage-linked securities “got what they deserved.”
William Poole criticized the underwriting standards and interest rate assessments of Wall Street and endorsed the Fed’s steps to strengthen consumer safeguards.
His remarks come after Chairman Ben S. Bernanke committed to tougher rules to protect consumers during his semi-annual monetary policy testimony this week.
“The punishment has been meted out to those who have done misdeeds and made bad judgments,” Poole said in St. Louis after a speech on the market for mortgage loans to borrowers with sketchy or weak credit.
“We are getting good evidence that the companies and hedge funds that are being hit are the ones who deserve it.”
Poole said that the bad credit home loan meltdown isn’t spreading to the broader financial services industry. His confidence didn’t prevent U.S. Treasury notes extending their rally, pushing the yield on the benchmark 10-year note to a six-week low.
Investors also dumped stocks because of defaults on home mortgage loans. Some 89 of 92 financial companies in the S&P 500 Index were lower, which pushed the S&P down 1.22 percent to 1,534.08.
A so-called ABX based on derivatives linked to subprime mortgage securities has fallen by more than 50 percent since January, suggesting a decline in the prices of such bonds. Another index suggests declines of percent in the value of AAA rated bad credit mortgage securities.
Members of Congress have criticized the Federal Reserve for lax supervision as borrowers took on $2.8 trillion of home loans between 2004-2006, the largest borrowing binge on record.
Bank regulators, including the Fed, published unenforceable guidance during that period and disciplined very few mortgage broker or lender groups.
“We need to search for ways to strengthen borrower protections without so increasing regulatory costs and risks to lenders that they withdraw from the non-prime market,” Poole said.
Poole, 70, discussed the U.S. economy briefly with reporters after his speech, and said that mortgage concerns and inflation expectations “seem to be controlled.”
Business cost pressures are “not triggering widespread wage and price increases,” Poole said, adding that he is watching expectations, measured by yield differences on Treasury notes and government inflation-indexed bonds. If that measure rose, “that would change my view.”
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