What Caused the Subprime Crisis?

Rep. Barney Frank on Congress’ plans for regulation

By Art Jahnke. Video by BU Productions

U.S. Congressman Barney Frank (D-Mass.), chairman of the House Financial Services Committee, told an audience at the School of Law auditorium on February 11 that the subprime mortgage crisis was caused in large part by mortgage companies that loaned money to people with bad credit and quickly sold the mortgages to third-party investors. The practice, said Frank, marked a risky shift in the way business was done in an industry with little regulation. Frank, who represents the Massachusetts Fourth Congressional District, said the loan crisis has persuaded many legislators that the time has come to impose regulations on nonbank mortgage lenders.

“From 1994 until last year, the dominant political philosophy in Washington held that government is dumb, and markets are smart,” said Frank, whose talk was part of the Edward Lane-Reticker Speaker Series hosted by LAW’s Morin Center for Banking and Financial Law.

“In 1994, Congress passed the Homeowners Equity Protection Act, which empowered the Federal Reserve to set rules on mortgages. Yet from 1995 until last year, the Federal Reserve refused to exercise that authority.”

Frank, whose district includes Brookline and Newton, said that three years ago, when a group of legislators attempted to move beyond the laissez-faire treatment of the mortgage industry and researched a bill that would look into subprime mortgages, the Republican majority ordered them to stop.

Since then, said Frank, things have changed, both because the Democrats have gained control of Congress and because the ongoing mortgage debacle has made the need for change difficult to deny. The crisis has been blamed for things ranging from a tumbling stock market to declining home values.

“Banks are subject to more regulations than the securities firms with which they are competing,” said Frank. “Now we need to regulate some of those other institutions. I think it is possible to deregulate some areas and regulate others. The job is to figure out how regulations can be upgraded so you get the benefits, but not the abuses.”

Addressing what he described as Republican objections to regulation, Frank told the audience that the size of the free-market system — $14 trillion — had persuaded him that “there is a wide range of public policy choices that we can make without endangering the capitalist system.”

“Home ownership is a good thing,” said Frank. “But we have made a great mistake in this society. There are people in the society who should not be allowed to borrow money to buy a home. And we have pushed people into home ownership who shouldn’t be there.”

To hear Frank talk about the history behind the subprime mortgage crisis, click on the video above.

Art Jahnke can be reached at jahnke@bu.edu.

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