Greenspan: 'Fallible' regulators were right to allow subprime loans

WASHINGTON - While admitting some mistakes, former Federal Reserve Chairman Alan Greenspan on Wednesday defended the central bank's much-criticized oversight of the subprime mortgage market, arguing that consumer protection was an important priority and that it did not make sense to outlaw all such loans.

Greenspan also warned the federal commission examining the origins of the financial crisis that government regulators couldn't prevent crises, arguing that "fallible human regulators" had a "woeful record" of predicting the next market pitfalls. The best prevention would come from increasing federal requirements on financial institutions to hold more capital and collateral to carry them through crises.

The Fed has been hammered for taking 14 years, until 2008, to enact rules to protect consumers from unscrupulous mortgage lending after Congress gave it the authority. Greenspan said the Fed closely monitored the subprime market, which grew from a "small but successful appendage" of real estate lending in the 1990s to a major force in driving up housing prices in the 2000s.

"The concepts of 'unfairness,' 'deception,' and 'abusiveness' are not defined in the statute, and I do not believe there was any prevailing sentiment within the Federal Reserve - and it was certainly not my view - that entire categories of loan products should be prohibited as 'unfair' or 'abusive,' " Greenspan told the Financial Crisis Inquiry Commission in just his second appearance on Capitol Hill since the collapse of financial markets in 2008. "For example, adjustable-rate mortgages that might be inappropriate for one borrower might be the most suitable option for another; low-down-payment loans to borrowers with limited savings but adequate income to support the monthly payments might be perfectly appropriate, while the same loans to borrowers who cannot document their income may not be."

"In short," Greenspan continued in his prepared remarks, "these and other kinds of loan products, when made to borrowers meeting appropriate underwriting standards, should not necessarily be regarded as improper, and on the contrary facilitated the national policy of making homeownership more broadly available."

Greenspan said the selling of the soaring number of subprime mortgages in securities to investors was the trigger for the financial crisis. He blamed affordable housing mandates set by federal officials on the government-sponsored housing enterprises Fannie Mae and Freddie Mac, and their subsequent large-scale purchase of securities backed by subprime mortgages, for the housing bubble that later burst, sending financial markets reeling.

But Phil Angelides, the commission's chairman, didn't buy Greenspan's explanation. While noting that there clearly were problems with Fannie and Freddie, which were seized by the federal government in 2008 in the face of huge losses on subprime mortgage securities, Angelides said the Fed still failed to write tough rules for those mortgages under Greenspan's tenure from 1987 to 2006.

"You did have the ability to regulate the products coming into the marketplace. I do want to make sure we're not rewriting or forgetting history here," Angelides said. "You could have, you should have, and you didn't."

Asked by Angelides if he would put the failure to enact tough subprime mortgage rules "under the category of 'oops, we should have done it,' " Greenspan said it was impossible to be right all the time.

"I was right 70 percent of the time, but I was wrong 30 percent of the time, and there were an awful lot of mistakes in 21 years," Greenspan said.

"Would you put this in the 30 percent category?" Angelides asked.

Greenspan responded, "I don't know, certainly part of it I would."

Later, in response to questioning by the commission's vice chairman, Bill Thomas, Greenspan went further.

"Did we make mistakes? Of course we made mistakes," he said.

But Thomas went easier on Greenspan, saying there was plenty of blame to go around.

"There are an enormous number of 'woulda, coulda, shoulda' from an enormous number of institutions in government and the private sector," Thomas said.

Greenspan also fought back against critics who have blamed a long period of low interest rates by the Fed for fueling the real estate boom. He said that mortgage rates became "delinked" from the short-term interest rates set by the central bank. For that reason, even as the Fed raised interest rates beginning in 2004, the housing boom continued.

Thomas questioned if raising interest rates earlier still would have had some impact on increasing mortgage rates, and therefore slowing the growth of housing prices. But Greenspan said it wouldn't have.

(c) 2010, Los Angeles Times.

Distributed by McClatchy-Tribune Information Services.