In March 2007, Federal Reserve chairman Ben Bernanke acknowledged that the subprime mortgage meltdown had brought severe financial problems to many U.S. households. But the impact on the broader economy and financial markets, he added, "seems likely to be contained."
That prediction, of course, proved to be wildly off the mark. Mr. Bernanke recently noted that in the spring of 2007 he did not recognize "the extent to which the system had flaws and weaknesses in it that were going to amplify the initial shock from subprime and make it into a much bigger crisis."
If the Fed chairman has a favorite tune these days, it’s probably the Who’s "Won’t Get Fooled Again." The question is whether lawmakers and other government officials are humming with him.
That concern was raised this week with the release of a report from the Congressional Oversight Panel, a federal watchdog created to monitor the government’s bailout program. The panel examined allegations of "robo-signing" and other irregularities by mortgage servicing firms and concluded that these problems "could potentially threaten financial stability."
The report is not alarmist. Its authors say the best-case scenario-a view held by the financial services industry-is that worries about mortgage documentation irregularities are overblown.
The worst-case scenario, however, "is considerably grimmer. … If documentation problems prove to be pervasive and throw into doubt the ownership of pooled mortgages, the consequences could be severe." Banks could find themselves saddled with millions of defaulted mortgages thought to have been sold off-and forced to post billions of dollars in unanticipated losses.
What’s more, the problem could extend beyond foreclosed properties to ordinary mortgages that were pooled and securitized.
The panel urged Treasury officials to probe the foreclosure problems vigorously and conduct new "stress tests" on the nation’s largest banks to determine their ability to weather another mortgage-related crisis.
Given the still-fragile state of the economy, this recommendation seems painfully obvious. Good news: On Wednesday, Treasury officials agreed.
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