Yesterday, the Washington Post offered a rather disturbing story about the abuses in subprime lending that led to the mortgage market crash. It appears that as early as 1999, consumer advocates were warning about the need for increased regulation in the subprime lending market, decrying the strict regulation that went on in prime lending, which needed it less, while subprime lending became a free-for-all. Here is some of what the Washington Post reports on the situation:

Under a policy quietly formalized in 1998, the Fed refused to police lenders’ compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies. …

Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates. …

“In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision,” former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. “It is like a city with a murder law, but no cops on the beat.”

This information offers a rather interesting (and depressing) look at what went on in the years of the housing boom. Clearly, all of the money being made by the people that matter to the regulators was incentive enough to get them to turn a blind eye. And, while the borrowers who over-extended themselves do bear some of the blame, it is clear that this problem could have been averted to some extent if regulators had been doing their jobs.

In the end, while some reforms are certainly necessary to regulatory law, the biggest reform needed is for regulators to actually, well, regulate.