Let's talk about it some more. There are multiple Federal regulators tasked to oversee the mortgage marketplace, from the Federal Reserve to the Office of the Comptroller of Currency to the Federal Deposit Insurance Corporation and others. In essence, a whole group of them with a specific area to monitor. What were they doing in the last several years? Not enough, it seems. To their defense I must say that some have sounded the alarm, warning about the lax underwriting guidelines and the Option ARM product, for instance, but did so without any larger following. Only now is Congress getting involved when the dark cloud is moving ominously closer. The important thing at this point is that the regulators refrain from overreacting. Adjustments must be made and pronto, but is has to be step by step with industry input. You don't want to suddenly jerk the home loan market to the other extreme and pulverize it.
Secondly, any bank that originates mortgages usually bundles them and then sells that bundle in the secondary market. There they are securitized and sold on, mostly to institutional investors. These people are considered professional who certainly understand risk and how to evaluate it. Or do they? They are highly trained to do just that. Well, why then did they buy mortgage-backed bonds with stated income and Option ARM loans in the portfolio? They wanted to make more money because the yields were nice and to get promotions. The usual. When the cat's away, the mice will play.