At 12 months, the current contraction is already the longest since the 16-month slump that ended in November 1982, and exceeds the postwar average of 10 months.
The contraction is the second under President George W. Bush’s watch, making him the first U.S. leader since Richard Nixon to preside over two recessions.
"AP IMPACT: They warned us, but US eased loan rules" by Matt Apuzzo, AP
The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.
"Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
"These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages," David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.
The administration's blind eye to the impending crisis is emblematic of a philosophy that trusted market forces and discounted the need for government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.
"We're going to be feeling the effects of the regulators' failure to address these mortgages for the next several years," said Kevin Stein of the California Reinvestment Coalition, who warned regulators to tighten lending rules before it was too late.
Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come. Many executives remain in high-paying jobs, even after their assurances were proved false.
In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:
- Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.
- Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.
- Regulators proposed a cap on risky mortgages so a string of defaults wouldn't be crippling.
- Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.
- Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.
Those proposals all were stripped from the final rules. None required congressional approval or the president's signature.
"In hindsight, it was spot on," said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending.
Federal regulators were especially concerned about mortgages known as "option ARMs," which allow borrowers to make payments so low that mortgage debt actually increases every month. But banking executives accused the government of overreacting.
Bankers said such loans might be risky when approved with no money down or without ensuring buyers have jobs but such risk could be managed without government intervention.
"An open market will mean that different institutions will develop different methodologies for achieving this goal," Joseph Polizzotto, counsel to now-bankrupt Lehman Brothers, told U.S. regulators in a March 2006.
Countrywide Financial Corp., at the time the nation's largest mortgage lender, agreed. The proposal "appears excessive and will inhibit future innovation in the marketplace," said Mary Jane Seebach, managing director of public affairs.
One of the most contested rules said that before banks purchase mortgages from brokers, they should verify the process to ensure buyers could afford their homes. Some bankers now blame much of the housing crisis on brokers who wrote fraudulent, predatory loans. But in 2006, banks said they shouldn't have to double-check the brokers.
"It is not our role to be the regulator for the third-party lenders," wrote Ruthann Melbourne, chief risk officer of IndyMac Bank.
California-based IndyMac also criticized regulators for not recognizing the track record of interest-only loans and option ARMs, which accounted for 70 percent of IndyMac's 2005 mortgage portfolio. This summer, the government seized IndyMac and will pay an estimated $9 billion to ensure customers don't lose their deposits.
Last week, Downey Savings joined the growing list of failed banks. The problem: About 52 percent of its mortgage portfolio was tied up in risky option ARMs, which in 2006 Downey insisted were safe — maybe even safer than traditional 30-year mortgages.
"To conclude that 'nontraditional' equates to higher risk does not appropriately balance risk and compensating factors of these products," said Lillian Gavin, the bank's chief credit officer.
At least some regulators didn't buy it. The comptroller of the currency, John C. Dugan, was among the first to sound the alarm in mid-2005. Speaking to a consumer advocacy group, Dugan painted a troublesome picture of option-ARM lending. Many buyers, particularly those with bad credit, would soon be unable to afford their payments, he said. And if housing prices declined, homeowners wouldn't even be able to sell their way out of the mess.
It sounded simple, but "people kind of looked at us regulators as old-fashioned," said Brown, the agency's former deputy comptroller.
Diane Casey-Landry, of the American Bankers Association, said the industry feared a two-tiered system in which banks had to follow rules that mortgage brokers did not. She said opposition was based on the banks' best information.
"You're looking at a decline in real estate values that was never contemplated," she said.
Some saw problems coming. Community groups and even some in the mortgage business, like Welch, warned regulators not to ease their rules.
"We expect to see a huge increase in defaults, delinquencies and foreclosures as a result of the over selling of these products," Stein, the associate director of the California Reinvestment Coalition, wrote to regulators in 2006. The group advocates on housing and banking issues for low-income and minority residents.
The government's banking agencies spent nearly a year debating the rules, which required unanimous agreement among the OCC, Federal Deposit Insurance Corp., Federal Reserve, and the Office of Thrift Supervision — agencies that sometimes don't agree.
The Fed, for instance, was reluctant under Alan Greenspan to heavily regulate lending. Similarly, the Office of Thrift Supervision, an arm of the Treasury Department that regulated many in the subprime mortgage market, worried that restricting certain mortgages would hurt banks and consumers.
Grovetta Gardineer, OTS managing director for corporate and international activities, said the 2005 proposal "attempted to send an alarm bell that these products are bad." After hearing from banks, she said, regulators were persuaded that the loans themselves were not problematic as long as banks managed the risk. She disputes the notion that the rules were weakened.
Marc Savitt, president of the National Association of Mortgage Brokers, said regulators were afraid of stopping a good thing.
"If it seems to be working, if it's not broken don't fix it, if everybody's making money, then the good times are rolling and nobody wants to be the one guy to put the brakes on," he said.
In the past year, with Congress scrambling to stanch the bleeding in the financial industry, regulators have tightened rules on risky mortgages.
Congress is considering further tightening, including some of the same proposals abandoned years ago.
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"U.S. Recession Started in 2007, Longest Since 1980s" by Timothy R. Homan and Steve Matthews, Bloomberg
The U.S. economy entered a recession a year ago this month, the panel that dates American business cycles said today, making this contraction already the longest since 1982.
The declaration was made by a committee of the National Bureau of Economic Research, a private, nonprofit group of economists based in Cambridge, Massachusetts. The last time the U.S. was in a recession was from March through November 2001, according to NBER.
Federal Reserve Chairman Ben S. Bernanke today said the economy “will probably remain weak for a time” and the Fed may use unconventional methods, such as buying Treasury securities, to spur growth. Should the recession persist for another five months, consistent with Fed and private forecasts, it would become the longest since the Great Depression.
“It is clearly not going to end in a few months,” Jeffrey Frankel, a member of the NBER committee and a professor at Harvard University, said in an interview. “We would be lucky to get done with it in the middle of next year.”
Separate reports today showed the recession has deepened. U.S. manufacturing contracted in November at the fastest rate in 26 years, according to the Institute for Supply Management, based in Tempe, Arizona. The Commerce Department said construction spending fell more than forecast in October as a slump in homebuilding spread to non-residential projects.
Stocks Slump
Stocks worldwide tumbled and yields on U.S. Treasury securities fell to the lowest ever on concern a lack of financing will stunt consumer and business spending.
The NBER designation means the U.S. was the first country to have slipped into a contraction. While definitions differ, the economies of both the euro area and Japan fell into a slump in the second quarter of this year, making it the first simultaneous recession in the three regions in the postwar era.
The loss of 1.2 million jobs so far this year was the biggest factor in determining the starting point of the U.S. recession, the NBER said. By that measure, the contraction probably deepened last month.
Payroll employment probably fell by 325,000 in November, the most since the last recession, according to the median forecast of economists surveyed by Bloomberg News ahead of a Labor Department report due Dec. 5. The jobless rate is projected to increase to 6.8 percent, the highest level since 1993.
Payrolls Drop
U.S. employers cut 240,000 jobs in October, a 10th consecutive decline. The unemployment rate rose to 6.5 percent, the highest level in 14 years, according to Labor Department statistics.
At 12 months, the current contraction is already the longest since the 16-month slump that ended in November 1982, and exceeds the postwar average of 10 months.
The contraction is the second under President George W. Bush’s watch, making him the first U.S. leader since Richard Nixon to preside over two recessions.
“The most important things we can do for the economy right now are to return the financial and credit markets to normal, and to continue to make progress in housing, and that’s where we’ll continue to focus,” White House Deputy Press Secretary Tony Fratto, said in an e-mailed statement. “Addressing these areas will do the most right now to return the economy to growth and job creation.”
Summers, More Action
Lawrence Summers, President-elect Barack Obama’s pick for White House economic adviser, said the economy is getting worse and requires more legislative action.
“Recent economic evidence suggests that the pace of this downturn is accelerating,” Summers said in a statement. He said Obama wants to enact a recovery package “soon after taking office.”
The likely length of this downturn may cast doubt on economists’ view that the business cycle was moderating in recent decades.
“Everyone had thought long, deep recessions were a thing of the past,” Frankel said. “There was a lot of talk of the new economy.”
Although a recession is conventionally defined as two quarters of successive contraction in gross domestic product, the private committee doesn’t require supporting GDP data to make a recession call. Its members focus on month-to-month changes in the economy.
The NBER committee defines a recession as a “significant” decrease in activity over a sustained period of time. The decline would be visible in gross domestic product, payrolls, industrial production, sales and incomes.
Getting Worse
The U.S. economy shrank at a 0.5 percent pace in the third quarter after expanding 2.8 percent in the previous three months. Economists at Goldman Sachs Group Inc. and Morgan Stanley in New York are among those projecting the economy will contract at a 5 percent pace this quarter.
Members of the committee are Frankel; Stanford University professor Robert Hall; Martin Feldstein of Harvard University; Northwestern University economics professor Robert Gordon; NBER president James Poterba; David Romer of the University of California at Berkeley; and Conference Board economist Victor Zarnowitz.
Do you hear the GOP mantra in the background? NO Regulation, No Regulation, No Regulation. We feel your pain.
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