All the Devils Are Here [58]
Not long after his arrival at the Fed in 1997, Gramlich was asked by Greenspan to head up the Fed’s committee on consumer and community affairs. This was not a prestigious post for a Fed governor, and Gramlich knew very little about the subject. But he dove in eagerly, becoming one of the country’s leading experts on the subprime business—and one of its leading critics. In 2007, Gramlich wrote a short book entitled Subprime Mortgages: America’s Latest Boom and Bust. “In the subprime market,” he wrote, “where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”
Gramlich, however, was not temperamentally suited to be the cop on the beat. As the hearings opened, he explained that the purpose was to see whether the HOEPA regulations should be tightened to force lenders to “consider the consumer’s ability to pay.” Given what would happen—indeed, given what was already happening—it would be hard to think of a more important line of inquiry. Yet Gramlich’s questions weren’t so much answered as they were parried. And he was too gentle a soul to push back.
One of the people testifying that day, for instance, was Sandor Samuels, the chief legal counsel for Countrywide. He objected to the idea that borrowers should be required to disclose their income—something you would think lenders would want to know before making a six-figure loan. “Let me just say, very briefly, that we think this is a very dangerous area to get into,” Samuels replied when asked about income disclosure. “Because the reality is that, in many communities, including many minority communities and immigrant communities, sometimes it’s difficult to document income.”
Gramlich: “The obvious question is: If you can’t document the income, how . . . do you know they can pay the loan back?”
Samuels: “Right. And I would say that there are certain reality checks, let’s just say . . . if a waiter in a restaurant puts down that he or she is making three hundred thousand dollars a year, we’re going to ask what kind of restaurant they’re working at.”
Around and around they went. Every objection the Fed panel brought up to a subprime practice got the same response: cracking down would mean denying worthy borrowers the opportunity to own a home. Finally, Gramlich asked Samuels for his advice on the best way to keep predatory lending practices in check. “We believe increased competition is the key,” Samuels replied, echoing Greenspan. Wall Street simply wouldn’t buy bad loans in bulk. Wall Street, of course, was already doing precisely that.
Gramlich ended the hearings by more or less throwing up his hands. “There are many practices that might be good most of the time, but end in abuse some of the time, so it’s difficult to simply ban practices,” he said. Should the government try to discourage house flipping? If it did that, it might also prevent people from taking advantage of falling interest rates. Should it forbid balloon payments? For certain borrowers, a balloon payment might make sense. And on and on. The hearings didn’t so much end as they sputtered, ignominiously, to a close.
There came a moment—it’s not clear exactly when—when Ned Gramlich went to see Alan Greenspan. He wanted the Fed to take a more active role in policing the subprime business. And he had a specific policy idea. According to the Wall Street Journal, Gramlich thought the Fed should “use its discretionary authority to send examiners into the offices of consumer finance lenders that were units of Fed-regulated bank holding companies.” (The GAO recommended the same thing, but the Fed had formally