From Rudolph Bell at GreenvilleOnline: Ex-Fed governor feels 'accountable' in economic crisis (ht Scott)

[Former Fed Governor from 2001-2007] Susan Schmidt Bies is having second thoughts about some of the votes she cast as a member of the Federal Reserve Board of Governors in the years leading up to the present crisis.

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"I never, never would have guessed it was going to be like this, never," she said.



In an interview with The Greenville News, Bies reflected on her time at the Fed -- and expressed regret at not acting to raise interest rates faster or doing more to strengthen mortgage underwriting.

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Bies said the bigger problem was lenders granting mortgages to people without the means to repay the loans. That concern fell to Bies, since she was the Fed's point person for bank oversight.



"As regulators, we didn't see the whole picture of how poorly the loans were being underwritten, because there's so many regulators in this country. None of us saw the whole picture, and we didn't tighten down enough, fast enough on it," Bies said.

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"I think everybody just really lost touch with how much the underwriting of loans had deteriorated," Bies said.

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Before the collapse, she said, "every bank risk model, every securitizer, broker dealer, all the rating agencies, were all basically where I was."



"I just didn't realize it was as bad as it was," she said.

[W]e see indications that underwriting standards are beginning to weaken. For example, "affordability products"--such as interest-only loans, negative amortizations, and second mortgages with high loan-to-value ratios--are becoming more popular; subprime lending is growing faster than prime lending; adjustable-rate mortgages, or ARMs, have grown substantially and now account for more than a third of all mortgage originations, the highest level since 1994. Industry experts are increasingly concerned about the quality of collateral valuations relied upon in home equity lending and residential refinancing activities. More homes are being purchased not as primary dwellings, but as vacation homes or pure investments, in which case anticipated price appreciation may be a large factor influencing purchase decisions.



... [T]he agencies have observed some easing of underwriting standards, with lenders competing to attract home equity lending business. Lenders are sometimes offering interest-only loans and are sometimes requiring very small down payments and limited documentation of a borrower's assets and income. They are also relying more on automated-valuation models and entering into more transactions with loan brokers and other third parties. Given this easing of standards, there is concern that portions of banks' home equity loan portfolios may be vulnerable to a rise in interest rates and a decline in home values. In other words, there is concern that not all banks fully recognize the embedded risks in some of their portfolios.



Bank supervisors today have similar concerns about commercial real estate lending, defined as those real estate loans in which the primary source of repayment is derived from the rental income or sale proceeds of commercial property. This has historically been a highly volatile asset class, and it played a central role in the banking problems of the late 1980s and early 1990s.

It's tempting to say: Hoocoodanode?But actually Bies did realize there was a problem, but she just didn't act aggressively to understand the depth of the problem ... here are some excerpts from a speech she gave in June, 2005:Yes, Bies was late realizing there was a problem. And she didn't seem to recognize the extent of the underwriting issues - even though this speech outlined many of the key issues and was given almost two years before New Century went down. Think of all those poorly underwritten loans made after Bies gave this speech. Why didn't the Fed move more aggressively to understand the underwriting issues, and why did they drag their feet for the next two years? I think those are key questions that still need to be answered.