Government regulators and banks continue to be shocked -
- by the swift and steep economic meltdown that was spurred by the housing collapse.
But more and more details continue to emerge that show bank regulators for years ignored warnings, and - with lobbying from the banks - torpedoed efforts to rein in risky lending practices now at the root of the mortgage meltdown.
In fact, federal regulators quashed state efforts to clamp down on so-called abusive predatory loans to borrowers with shaky credit. Instead, the regulators and some lawmakers sided with the very banks now begging for a bailout.
Even an attempt by Philadelphia City Council to stop predatory lenders was scuttled. Citigroup Inc. led the effort to kill a Council bill in 2001 that would have prohibited the city from doing business with or investing in companies that make predatory loans. Just last month, the federal government gave Citigroup $20 billion, on top of a previous $25 billion, and agreed to guarantee $306 billion in toxic assets.
As far back as 1999, Fannie Mae - one of two government-sponsored lenders, along with Freddie Mac, which hold the majority of home mortgages in the United States - moved to reduce down-payment requirements for many of the loans it guaranteed.
The move was designed to boost home ownership, and worked fine as long as home prices continued to rise. But once the economy slowed, Fannie and Freddie, as well as many other home lenders, ran into deep financial trouble. The risks behind the move were plain to see.
Investment guru Warren Buffett sold nearly all of his company's stock in Fannie Mae and Freddie Mac in 2000 because he was "uncomfortable with certain aspects of the business."
Many now believe the increased risk was driven by the growth of the subprime lending industry, which used easy access to credit to push more and more mortgages on unqualified buyers. Problems surrounding many of the subprime loans were also well-documented, but often ignored.
Lenders gave mortgages to borrowers without any proof of income. Home appraisals were inflated. Loans were approved with no money down or crafted to allow payments so low that the outstanding mortgage actually increased each month.
Many borrowers were poor, elderly, or not sophisticated enough to understand what they were getting into. Others knew the risks, but figured real estate prices would keep going up. As such, they used their homes as cash machines, taking on more debt to finance a lifestyle beyond their means.
In 2002, Georgia tried to stop the explosion of predatory loans that were leading to a jump in foreclosures. Other states followed suit, including New Jersey and New York.
But the banks lobbied the Treasury Department's Office of the Comptroller of the Currency, claiming the patchwork of state laws would make it cumbersome to do business across the country. In 2004 the OCC - whose main job is to ensure the soundness of the banking system - said the state laws didn't apply to national banks.
The following year, to limit defaults, bank regulators proposed new lending guidelines. The measures included documentation to verify that borrowers made enough to afford the home, and caps on the number of risky mortgages. Banks that sold off bundled mortgages would have to make clear to investors what they were buying.