And today, Zillow reported that banks and home loan companies will not grant mortgage loans to a whopping one-third of Americans. Since the subprime mortgage blow-up, lenders have refused to extend conventional lending products to the bottom 33 percent of credit-seekers, those with FICO scores of about 620 or less, even if they put down 25 percent.

The mortgage documentation at this place is really terrible. And such small portions!

Even if monetary policy was not a principal cause of the housing bubble, some have argued that the Fed could have stopped the bubble at an earlier stage by more-aggressive interest rate increases. For several reasons, this was not a practical policy option. First, in 2003 or so, when the policy rate was at its lowest level, there was little agreement about whether the increase in housing prices was a bubble or not (or, a popular hypothesis, that there was a bubble but that it was restricted to certain parts of the country). Second, and more important, monetary policy is a blunt tool; raising the general level o f interest rates to manage a single asset price would undoubtedly have had large side effects on other assets and sectors of the economy. In this case, to significantly affect monthly payments and other measures of housing affordability, the FOMC likely would have had to increase interest rates quite sharply, at a time when the recovery was viewed as “jobless” and deflation was perceived as a threat.

That gives me occasion to publish this astonishing chart of the housing bubble posted by Kevin Drum, showing prices remaining stable until about 2003 before heading skyward. (The Federal Reserve started hiking interest rates before housing prices peaked, in June, 2004.)

An interesting paper flagged by Felix Salmon argues that the primary cause of the housing bubble was an over-investment in mortgage-finance products, priced too low because of a misunderstanding of their risk: “The rise of private-label [mortgage-backed securities] exacerbated informational asymmetries between the financial institutions that intermediate mortgage finance and MBS investors. The result was overinvestment in MBS that boosted the financial intermediaries’ profits and enabled borrowers to bid up housing prices.”

Mortgage servicing will never be the same again. The unprecedented volume of delinquent loans over the past three years has triggered within the industry a sweeping re-examination and re-engineering of its delinquency and loss mitigation management practices. While the ultimate impact of this incredible period of financial stress, distended unemployment and evaporating equity has yet to be fully revealed, I believe the way the servicing industry has responded will significantly enhance its ability to react expediently and comprehensively to future downturns.

Of course, the mortgage business should never be the same again, since the notion that home prices on aggregate would never decline was exposed as myth. Companies that originate and purchase mortgages, like Freddie, should have plans for what to do when the housing market goes south. But again, a Freddie executive walks through the new modification efforts without mentioning right-to-rent or principal reduction — two programs that offer a clear path to keeping people in their homes and preventing a further slide in housing prices.

Diane E. Thompson, a lawyer with the National Consumer Law Center, begs to differ. As part of the Federal Reserve’s Consumer Advisory Council, she and other consumer advocates alerted him to the looming crisis in mortgages starting in the early 2000s. We spoke earlier today; the interview transcribed below is lightly edited for length and clarity.

Greenspan’s testimony seemed to contradict even the Fed’s own reports on the housing bubble.

I was surprised to read what he said, because he articulated a view that’s been thoroughly discredited over the past several years. There was no meaningful regulation [in housing by the Fed] between 2000 and 2008. Statements were issued, but they weren’t binding — they were advisory and worked around the edges of the problem. Plus, there weren’t even any such statements during the height of the crisis! When things were gathering steam and hens were coming home to roost, the Fed did nothing. And it did nothing despite the fact that many consumer advocates were warning about loans in the subprime market. He says that he believed the sub-prime market was so small it wouldn’t matter to the broader economy. But obviously it did.

I also found it interesting that he said the problem was the demand for those loans. To some extent I agree with him. There was demand for these loans, of course, but had there been meaningful restrictions in place, this would not have become the crisis it did. The Fed finally put those restrictions into place in 2008.

The other point that struck me was his description of how involved the Fed was. He has cited the Consumer Advisory Council, but it was created by statute. The Consumer Advisory Council doesn’t exist by the good of the Fed’s heart. The years I served on it, it was dominated by industry. The Fed governors would say, “We have all these meetings with the Consumer Advisory Council! We get an interchange of views!” But my experience was that it was difficult to get consumers heard.

And the crisis was easier to see from the end-user, consumer side of it than the banking side?

The problem was obvious to those of us who worked in the communities where the housing bubble originated, particularly the African-American and Latino communities that were just obliterated by subprime lending. I think that there was this understanding that this was a minority-community problem — deplorable, but not exportable to the rest of the economy. That was wrong.

How often and how strongly did the Consumer Advisory Council warn the Fed about the housing bubble?

The council meets three times a year, and I was on it for three years, in 2003, 2004, and 2005. I know that during my time on it, as well as before me and after me, there were consumer advocates who said, “There are problems in the subprime market, and they could impact the entire mortgage market and the entire economy.“

That isn’t to say — I will not claim to have predicted the financial meltdown. To be honest, I was shocked, because I assumed that investment bankers had a better grasp of risk management. But, I know for years before I came on, and for years after I went off, at least from 2001 to 2007, at every meeting, people said, “There are problems in the subprime market. These policies aren’t promoting home ownership. If anything, they’re going to end up doing the opposite.”

I have heard statements from Greenspan in the past two years that seem to me more reflective of the role the Fed played and more cognizant of the fact the Fed missed signs of the crisis, which he did not say here.

What else surprised you in the testimony?

I was surprised at the attack on the GSEs [government-sponsored enterprises, Fannie Mae and Freddie Mac]. I was particularly surprised that he said that the banks weren’t the problem, but that the GSEs were. They got into the subprime boom late — and they aren’t what is driving the current foreclosure crisis. They contributed to the volume for some bad loans, but so did the large banks.

And so ultimately, as a consumer advocate…

There’s an assumption that runs throughout his testimony that these toxic products were in fact affordable products that increased home ownership. That continues to be a popular view among bankers. If you get rid of these toxic products you will reduce homeownership; these products help increase homeownership. That is contrary to all of my experience. There is just a weird tautology in saying there wasn’t a problem in the origination of the loans, but the demand for them.

There’s tremendous demand for cocaine — it would be like saying the issue isn’t the sale of cocaine, but the fact that there’s tremendous demand for cocaine. It is just bizarre. Can you imagine our drug enforcement focusing exclusively on drug users rather than drug dealers?

Before the fourth quarter of 2008, there were always more subprime than prime mortgages in severe delinquency, defined as more than 60 days past due for regular mortgages or more than 30 days overdue for mortgages held by bankrupt borrowers. While delinquencies were and remain a larger percentage of the much smaller subprime portfolio (which is, after all, why those borrowers are considered subprime), in the fourth quarter, the sheer volume of prime mortgage delinquencies overtook subprime for the first time. The newest report shows that 2009 was not kind to prime mortgage holders, as nearly one million of them were in severe delinquency. That represents a 76 percent increase over just a year before, and is more than double the number of subprime mortgages in severe delinquency.

While the mortgage crisis — and the efforts to find solutions for it — has often revolved around the subprime market, the subsequent economic crisis, unemployment and plummeting home values have taken a severe toll on even the borrowers judged most credit-worthy only a few years earlier. Severe delinquencies lead to bad marks on one’s credit report, lowering credit scores and driving more people into subprime credit territory.

We were curious: During the boom, did former Fed Chairman Alan Greenspan ever go to the meetings? Maybe rub elbows with consumer advocates who were sounding the alarms over high-rate subprime mortgages?

Our researcher, Rachel Hartman, got some limited info from the Fed. From 2000 to the end of his term in 2006, Greenspan never attended a single CAC meeting.

The lawsuit, filed in federal court in Tennessee, marshaled a raft of statistics to argue that Wells Fargo offered one lending reality for whites and another for blacks. In Shelby County, which includes Memphis, one of every eight Wells Fargo loans in predominantly black neighborhoods resulted in foreclosure, compared with only one in 59 such loans in white neighborhoods, the lawsuit said.

Such charges, if proven, amount to reverse redlining — marketing expensive loan products specifically to black customers.

For anyone who’s been following the reporting of TWI’s Mary Kane on Wells Fargo, this should come as no surprise. First, there was that Cleveland case in which Wells was found to be violating public nuisance laws by failing to clean up its foreclosed properties. Next came the charges from the state of Illinois that Wells had targeted Latino residents for subprime loans, even in cases when potential borrowers could afford less expensive options. Then came the California-based class-action lawsuit alleging subprime discrimination against the bank. And finally, Mary uncovered the bank’s alleged strategy of hiring high-profile black figures such as Tavis Smiley to lure potential black borrowers to “Wealth Building” seminars, where Wells employees would be waiting to sign attendees up for more expensive subprime loans, according to a lawsuit filed by the Illinois attorney general.

Almost seems like there’s a trend here.

First some background: The vanilla option means a consumer gets presented with the most basic financial product first, then can choose to add on or buy into something more complex. With the vanilla option, a borrower would first be offered a standard, 30-year fixed loan. If the borrower wanted something more exotic, like an adjustable rate mortgage with a balloon payment, he or she would deliberately choose to go that route. The idea is to avoid all the confusion that surrounds some financial products, from add-on insurance on credit cards and checking accounts to mortgages so complicated the borrower isn’t entirely sure of the terms of his own loan.

From Rortybomb:

I was at a dinner party with some friends a few weeks ago, and the topic of credit cards came up. One friend talked about how she had just realized she had been paying for “credit card insurance.” What is that? If she died, her balance would be paid off. She is a 24 year old law student, who doesn’t carry a balance and has no dependents – it didn’t seem like it was a great value for her. She had to jump through some paperwork to get it turned off, and ultimately did, but for a few months there her credit card company was earning fees off something their customers didn’t want.

The funny and sad part is that we all had these stories (what are yours?). I had “unemployment insurance” on my checking account, where I’d get like two months salary if I was laid off – or something, the terms seemed so off for what I wanted (I was 22), I also shut it off after a few months of paying fees for it. The table was a collection of very well educated people who work in new economy jobs and lead upper-middle class with no families, so we could chuckle at the fact that the companies that provide us financial services were able to “get us” for maybe a couple hundred bucks, and felt a pang of sadness and guilt about what that difference would mean if we lived paycheck to paycheck. The question we asked ourselves was, what do you do about it?

The answer is obvious: you create a baseline, a vanilla option, and then let consumers decide what extra options they want to have in addition to it. Credit card insurance and unemployment insurance is probably valuable for someone, and that person would be excited to pay extra fees to have it. As Daniel Davies famously said, good ideas do not need lots of lies told about them in order to gain public acceptance. A corollary for innovation would be that you shouldn’t need to trick people into signing up for something that is genuinely innovative. Nobody was tricked into the internet.

Despite that obvious answer, the vanilla option seems to have bitten the dust – and it really didn’t have to end this way:

I don’t think it was ever explained very well by anyone in the administration, and perhaps I should have done a better job trying to explain how it is less adversarial than it looked on first examination. It is adversarial to the current way things are done, with massive profits coming from providing services consumers don’t want; and it is my fear that those profits contribute so much to the “safety and soundness” of large banks, the Fed’s first responsibility, that the Fed will have zero interest in breaking this terrible equilibrium financial services have gotten themselves into.

R.I.P., vanilla option. One more win for the banks, and another defeat for consumers.

Be sure to check the fine print on all your credit card and banking statements. No one else will be looking out for you.

To say the market has been sluggish would be an understatement. The main problem is sheer volume – a staggering 150,000 vacant housing lots across metro Atlanta are available, more than a decade’s supply at current absorption rates.

The median sale price for empty lots has plunged from $57,000 at the height of the housing boom in 2007 to $30,000 this year, according to Smart Numbers, a Marietta company that tracks the local real estate market.

“It’s going to keep going down, because we have too many lots, and there’s not enough demand,” said Steve Palm, the firm’s president.

To add to the woes, smaller banks are complaining that bigger banks that received bailout funds have an unfair advantage when it comes to getting zombie subdivisions off their books.

Large banks that have received federal bailout funds are better able to sell property at sizable losses, which pushes down prices for everyone, said Joe Moss, at Security Exchange Bank in Marietta.

“We don’t have the ability to take asset write-offs against taxpayer money like these larger banks have,” Moss said. “That’s really affected the market.”

This isn’t just a Georgia problem. As TWI has reported, the foreclosure pipeline remains clogged with a huge backlog of bank-owned foreclosures, or Real Estate Owned properties, that have yet to hit the market. The zombie subdivisions are part of this, and they are evidence that the housing market has yet to hit bottom. As Reuters noted recently, bank-owned foreclosures have created a shadow inventory that will hold back any recovery for months or years to come.

“Shadow inventory has the potential to give us another leg down on home prices during the second half of the year,” said Steven Wood, chief economist at Insight Economics in Danville, California.

“It appears that there is a significant amount of shadow inventory in the form of bank owned properties, which will continue to grow with the rising in delinquencies,” he said. It can take about 4-6 months for a house for be out of foreclosure and ready for sale.

Abandoned subdivisions and neighborhood blight caused by vacant bank-owned properties are part of the human cost of a looming shadow inventory, but the problem hasn’t gotten much attention. As zombie subdivisions pile up in Georgia and elsewhere, increasing the visibility of the situation, that could change. You can’t really miss them when you drive by — the half-built homes, the weedy areas where the community pool was supposed to be. In some cities, it’s even worse, with trashed and vandalized bank-owned homes dragging down the surrounding neighborhood. Somehow, however, Washington continues to fail to see it.

All that changed when the financial crisis hit, subprime mortgages tanked, and the government had to step in and bail out Fannie and Freddie last fall. Since then, the government’s efforts to prop up the two agencies has quietly become one of the biggest and most expensive bailouts, with the taxpayer tab expected to exceed $100 billion, CNN Money says.

And now comes the news the government wants to take another run at fixing Fannie and Freddie — by taking toxic mortgages off its books and placing them in a “bad bank” instead, The Washington Post reports.

The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac that would strip the mortgage finance giants of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market, government officials said.

The bad debts the firms own would be placed in new government-backed financial institutions — so-called bad banks — that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate.

All this is quite a big deal, The Post explains:

The moves would represent one of the most dramatic reorderings of the badly shattered housing finance system since District-based Fannie Mae was created by Congress to support mortgage lending during the Great Depression. Both Fannie Mae and Freddie Mac, based in McLean, have government charters to buy home loans from banks, which they then repackage and sell to investors. The banks can then use the proceeds to offer more loans to home buyers.

At Clusterstock, however, Joe Weisenthal isn’t impressed, saying this move will only leave Fannie and Freddie open to creating havoc in the housing market once again.

This is a terrible idea.

It’s not that it’s a bailout, as these schemes typically are. That ship is already sailed. We already know we’re going to guarantee every last dollar of their debt.

No, the problem is that we’ll be creating two new, reinvigorated GSE, with AAA balance sheets and government guarantees to match. This means they’ll be able to create havoc in the housing market all over again. Maybe they’ll start modestly, with strict guidelines or whatnot — but then, since so much of the turnaround plan revolves around bad lending practices (document-light lending, high LTV ratios, etc.) they very well may go straight back to their old ways. Certainly, the political pressure will be on them to prop up as much of the market as they can handle.

We’ve already bailed them out. Is it too much to ask that they slink quietly off into the night?

Treasury Department officials told The Post that any proposals are still in the early stages. The basic idea would be to use the “bad bank” for toxic assets, and then create new companies or agencies – the “good banks” – to attract private  investment to support mortgage lending.

Redoing Fannie and Freddie doesn’t seem to be in question; it’s the details that are under debate. Overhauling the two agencies will be huge, and one of the biggest challenges to come out of the housing crisis. So much for obscurity. A very public fight to remake the futures of Fannie and Freddie is on.