Credit crunch likely to spur reforms

But no one is sure what is the best response, short of helping people to avoid foreclosure.

By Mark Trumbull | Staff writer of The Christian Science Monitor

from the September 14, 2007 edition

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Washington - After the collapse of Enron and WorldCom, Congress passed the Sarbanes-Oxley Act to clean up corporate accounting.

After the stock market crash of 1987, regulators created a new "circuit breaker" to keep computerized stock trades from throwing share prices over a cliff.

What will be the policy fallout from the housing and mortgage meltdown of 2007?

The answers will take some time to emerge, especially since policymakers are focusing first on how to calm credit markets and to help at-risk homeowners avoid foreclosure.

But one thing seems clear: Federal fixes, when they come, are likely to be multifaceted, because of the complex web of factors that caused the current housing crunch.

In fact, the credit bust could open the door to a full-scale overhaul of the nation's financial regulatory structure – a move that some policymakers on both ends of the political spectrum say is long overdue.

Even if the responses prove to be narrower in scope, they could end up affecting everyone from home appraisers to the mortgage finance companies that now rest outside the oversight of bank regulators. And the Federal Reserve, although it enjoys wide freedom from political influence, might tinker with its own playbook after some Monday-morning quarterbacking.

"There's plenty of blame to go around," says Mark Zandi of Moody's Economy.com in West Chester, Pa. Everyone involved in originating, securitizing, and purchasing mortgage loans, he says, "had some part in the problems we're now experiencing."

Those problems are twofold. The end of the housing boom spells financial distress – and possibly foreclosure – for 1 million or more homeowners who can't afford the rising monthly payments on their adjustable-rate mortgages.

Second, global financial markets are in their own distress, as banks and other investors struggle to mark down the value of complex securities that include those tottering mortgage loans.

Many actors set the stage for the crisis, economists say.

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