Ben Bernanke is closing the barn door that Alan Greenspan left open to allow fraud to run wild in our mortgage system. If he's lucky, Greenspan will be able to see how well Bernanke's plan works in about a decade when the mortgage market starts to heat up again.
What Bernanke has done, according to the New York Times, is to propose that mortgage companies must show that customers can realistically afford their mortgages. He also proposed that lenders be required to disclose the hidden sales fees often rolled into interest payments, and he'd like to ban certain types of lender advertising that encourages people to take on mortgages they can't afford.
Since 47% of the $1.3 trillion subprime mortgage market was made up of no documentation loans -- e.g., liar loans -- Greenspan's policy of turning a blind eye to deceptive practices was institutionalized. He was so enamored of the idea that securitization would diversify away all the risk of people who could not pay back their loans that he ignored warnings from the likes of the late Fed governor Ed Gramlich.
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