type: timeline_event
On September 29, 2006, the Office of the Comptroller of the Currency, Federal Reserve, Federal Deposit Insurance Corporation, Office of Thrift Supervision, and National Credit Union Administration issued final "Interagency Guidance on Nontraditional Mortgage Product Risks," published in the Federal Register on October 4, 2006. The guidance addressed risks from interest-only mortgages and payment-option adjustable-rate mortgages. However, the final rules were significantly weakened from the proposed December 2005 version, and came nearly a year too late to prevent the crisis already underway.
Throughout 2006, industry advocates had submitted extensive comments opposing tougher regulation. In January 2006, California mortgage lender Paris Welch had warned regulators: "Expect fallout, expect foreclosures, expect horror stories." Kevin Stein of the California Reinvestment Coalition wrote: "We expect to see a huge increase in defaults, delinquencies and foreclosures as a result of the over selling of these products." Yet banks that would soon become synonymous with failure lobbied aggressively against the rules. David Schneider, home loan president of Washington Mutual, told regulators in early 2006: "These mortgages have been considered more safe and sound for portfolio lenders than many fixed rate mortgages." WaMu would become the largest bank failure in U.S. history two years later.
The government's banking agencies spent nearly a year debating the rules, which required unanimous agreement among the OCC, FDIC, Federal Reserve, and OTS. The Fed under Alan Greenspan was reluctant to heavily regulate lending, while the OTS worried that restricting certain mortgages would hurt banks and consumers. Bowing to aggressive lobbying—along with bank assurances that troubled mortgages were acceptable—regulators delayed action for nearly a year. By the time the final rules were released, the toughest proposed provisions were gone and the housing meltdown was under way. The banks that lobbied most aggressively—IndyMac, Countrywide, Washington Mutual, Lehman Brothers, and Downey Savings—would all collapse or require government intervention within two years. This regulatory failure represents a textbook case of industry capture, where the institutions being regulated successfully neutered oversight meant to protect consumers and the financial system.