February 11, 2008 Mass. congressman works to increase mortgage regulation Play video

(NECN) - Massachusetts Congressman Barney Frank says record foreclosures and financial market turmoil are symptoms of one of the worst economic crises ever in the U.S. The biggest culprit, he says, is inadequate regulation of the financial industry.

Frank explained to Boston University law students his lessons of the sub-prime crisis. Foremost, recognizing the sub-prime market, mortgages for people without great credit, took off when lenders figured out they could bundle higher risk mortgages with lower risk ones, and resell the asset backed paper to investors spreading the risk.

One reason financial stocks have gotten hammered is because investors of a mortgage-backed security can no easily tell what share of the home portfolio is troubled loans. That creates uncertainty about the whole.

Frank blames the lack of accountability. He says, “an increasing number of loans were made by people who did not have to worry about being paid back by the borrower.” Frank is Chairman of the House Financial Services Committee, which oversees the industry. He wants to require all lenders to put every loan on their balance sheets. Maybe even set aside higher pools of reserves to cover the failure of people paying their mortgages. The notion is to build an incentive to be more careful.

Frank also wants any pension fund or bank that has bought a loan made elsewhere to be legally liable for it. One BU law professor does not believe regulation can be mandated

without substantial input from the industry, which might otherwise figure ways to get around it. Still, she says companies must recognize some regulation is in their best financial interest.

NECN’s Mont Fennel has more.