WASHINGTON -- Anyone looking to point a finger of blame for the meltdown in the subprime mortgage market may need more than two hands. It took the action, and the inaction, of many players to produce today's mess, which threatens to slow the U.S. economy further.
"Everyone has a share in the blame - lenders, borrowers, regulators, investors. There were a lot of mistakes, and everyone made them," said Mark M. Zandi, the chief economist for Moody's Economy.com, a consultant in West Chester, Pa.
The federal government might be considered to have failed most of all. It shirked its responsibility to regulate this critical area of home finance - much as it had during the savings-and-loan crisis of the 1980s.
At least nine federal agencies oversee some portion of the mortgage market, and over the past three years nearly all of them issued warnings about risky loan terms.
But not one of them - or Congress - moved to regulate non-bank lenders and mortgage brokers. Both fall through the cracks of direct federal regulation.
Together, they originate more than half of all subprime loans to borrowers with weak credit histories, according to the Federal Reserve.
They also account for 80 percent of the adjustable-rate, subprime mortgages that are the heart of today's problems.
Why didn't regulators act more forcefully?
When times are good, regulators are wary of taking away the punch bowl. During the housing boom of 2001-2005, President Bush talked up soaring home sales to promote his vision of an "ownership society."
Home sales buoyed an economy that was rocked by the dot-com bust, but regulators knew that problems were brewing in the subprime mortgage market, much as they had in the earlier savings and loan crisis.
Still, they watched as the sector slowly crumbled into financial disaster because it was something of a sideshow. The main imperative was to keep the economy growing.
"We knew there was excessive use of adjustable [mortgage] rates. That was a time when the Fed had interest rates very low, for good macroeconomic reason, but it made everyone vulnerable to this problem" that we have today, said Edward M. Gramlich, a Federal Reserve governor from 1997 to 2005 and the author of the forthcoming book Subprime Mortgages: America's Latest Boom and Bust.
With lending rates low and home prices soaring in 2004 and 2005, many borrowers took on heavy risks, some gambling that home prices would keep climbing and that rates would remain low.
But in June 2004, the Fed began 17 consecutive quarter-point interest rate increases over two years, bringing its benchmark rate up to the current 5.25 percent from 1 percent.
For many consumers, adjustable rates rose, and borrowers saw their monthly mortgage payments rise 30 percent or more.
Today, about 14 percent of subprime loans are delinquent. Industry research shows that another 2 million adjustable-rate loans will reset this year and next, which could cause delinquency and foreclosure rates to soar.
Concerns about the subprime market and bad weather combined in March to spark the biggest monthly drop in existing home sales in 18 years. The National Association of Realtors said March sales slumped 8.4 percent over February figures.
Subprime loans make up 15 percent of the mortgage market, which limits their damage to the broader economy. But similar mortgage delinquency problems also are emerging among borrowers with better credit.
Nervous lenders are tightening credit defensively, further delaying the recovery of the moribund housing market.
During the housing boom, global investment banks such as Merrill Lynch & Co. Inc. and HSBC Holdings PLC snapped up non-bank lenders such as First Franklin Financial Corp. and Household International Inc., large mortgage-issuing finance companies that specialized in the subprime market. They weren't subject to federal banking supervision, either.
These non-bank lenders and mortgage brokers began issuing large numbers of risky and exotic adjustable-rate loans with low teaser rates, as well as so-called "liar loans," which asked borrowers their income but rarely verified it.
Federal regulators did little but issue warnings.
Since 2003, the federal regulators that oversee banks, savings and loans institutions and credit unions all warned about loose lending standards and risky loans.
The regulators include the Federal Deposit Insurance Corp., the Treasury Department's Office of the Comptroller of the Currency and the Office of Thrift Supervision.
None sought powers
But none of them suggested that they be granted powers to regulate mortgage brokers, which today are subject only to a patchwork of state regulations and no national licensing or standards.
Nor did anyone seek to regulate non-bank lenders, which increasingly are bankrolled by Wall Street. That left plenty of room for predatory lending and looser standards.
In short, there was a gaping hole in the regulatory net, but no one tried to mend it. Not the regulators. Not the Bush administration. Not the Congress.