When Rosenberg wrote his report, home prices in such markets as San Diego and Los Angeles already had climbed 80 percent, and Rosenberg described classic bubble characteristics: overheated prices, overownership, too much debt, speculation, complacency and denial.
He noted that subprime lending to people with lower credit scores and incomes had risen 25 percent on average throughout the decade, and that lenders could be at risk if people couldn't make payments or sell their homes in a weakening economy.
Citigroup economist Steven Wieting raised similar concerns. And as ARMs became increasingly popular, Morgan Stanley economist Stephen Roach also referred to an "ominous surge in demand for adjustable-rate mortgages," especially among lower-income people who wouldn't be able to afford higher payments. Roach noted that from 2001 to 2003, ARMs amounted to about 20 percent of new mortgages, but by May 2004 half of the people getting loans were taking chances on them.
Meanwhile, Yale economist Robert Shiller emphasized to Barron's magazine that home buyers were making the dangerous assumption that "nothing beats a home as an investment because prices just keep rising."
While the economists were flashing warnings, consumer advocates also were busy asking Congress and the Federal Reserve to stop lenders from tantalizing homeowners with loans they would not be able to afford. They claimed that borrowers were not being warned about the monthly payments they would owe after resets, and that lenders were granting loans to people they knew couldn't handle the payments.
Mortgage brokers could make more money by putting people in subprime adjustable-rate mortgages rather than fixed-rate mortgages, said Eric Halperin, director of the Center for Responsible Lending. And borrowers often did not know they had cheaper, more attractive alternatives that would have saved them financial grief.
One Fannie Mae study estimated that 50 percent of subprime borrowers could have qualified for prime loans, which probably would have been more affordable for borrowers but less lucrative for lenders and mortgage bond investors.
The ARM lending craze set off a spiral of financial stress, said Kathleen Keest, senior policy counsel for the Center for Responsible Lending.
"Brokers would troll through lists to find people that were about to face a higher rate on their mortgage and then contacted them and offered a rescue," said Keest.
In fact, the new subprime loans were anything but a rescue. To get the loans, individuals often incurred thousands of dollars in fees that ate up their equity and put them on a collision course from the outset, she said.
As early as 1999 to 2000, consumer advocates were tracking what Keest calls a "foreclosure crisis," in which one in four homeowners were unable to handle payments.
"The industry wouldn't listen," she said.
With home prices rising, homeowners were able to refinance or sell homes when they couldn't afford mortgages. So the defaults didn't show up on the surface. The Center for Responsible Lending found them by digging through records. Wall Street and investors might have averted the credit crunch if they had done the same.
Government turned deaf ear
Despite numerous hearings, Congress and the Federal Reserve failed to adopt the protections that consumer advocates were requesting. Advocates say they ran into heavy lobbying by mortgage lenders and Wall Street firms involved in securitization, or the process of blending expected mortgage payments into the bonds that recently plunged in value, left banks with billions of dollars in write-downs and touched off a credit crunch.
In a House of Representatives hearing in November 2003 titled "Protecting Homeowners: Preventing Abusive Lending While Preserving Access to Credit," Cameron Cowan of the American Securitization Forum testified on behalf of the fast-growing $6.6 trillion industry.
By fabricating bonds from the payments people are expected to make on everything from credit cards to mortgages, he said, the industry was making it possible for more people to get loans at low prices. Cowan urged Congress to avoid regulation and also to stop state and local governments from measures aimed at curbing predatory lending.
The hearing, of course, occurred about four years before Wall Street's subprime-mortgage-related bonds turned into a debacle and a threat to banks and the economy. Cowan concluded his remarks at the hearing this way: "Regulation in this area could easily cause more harm than good."
TO OUR READERS: Today's report on mutual fund and stock performance takes the place of the Monday Business section, which will return next week.