Events News
Federal Reserve Bank Official Speaks to Moore Students
"Financial innovation" in housing loans and
lending "outpaced risk management" - leading to the subprime lending debacle and subsequent housing
meltdown in parts of the United States, the Assistant Vice President of the Federal Reserve Bank of
Philadelphia said at a Moore School of Business lecture March 3.
Dr. Todd A. Vermilyea (BS ’87, Ph.D. ’98) spoke to a standing room crowd of more than 250 students, faculty and community members in the Lumpkin Auditorium at Moore. His talk was entitled "Subprime Loans and Lending." (Subprime loans, generally speaking, are those made to people with a weak borrower credit history.)
Subprime home loans that were bundled into mortgage-backed securities and sold on Wall Street were one of those "financial innovations" that helped cause the current problems in the U.S. housing and credit markets, Vermilyea said. In response, the Federal Reserve is now proposing four "key protections" for higher-priced mortgage loans secured by a consumer’s principal dwelling. These include creditors being prohibited from extending credit without considering the borrowers' ability to repay the loan, and creditors being required to verify the income and assets they rely on to make the loan.
Vermilyea acknowledged that the Fed has been criticized for not applying the rules that already existed in the banking industry to all financial institutions. "I think that criticism is reasonable," he said. The biggest problems occurred with "poorly capitalized" financial institutions that were making loans, he added.
The Fed is seeing foreclosure rates of homes "in places we haven't seen before," Vermilyea
said. The western states, along with Florida and Michigan, have been most affected by the
housing price run-up and then decline.
There "did seem to be a breakdown" in the way financial markets "are supposed to work,"
Vermilyea said. The question now is: "Who holds the losses?"
Jan Collins
March 2008