The Associated Press put out a story yesterday reporting that the Bush Administration ignored in-house warnings of an impending mortgage collapse in 2005, delayed enacting proposed rules for a year, and bowed to lobbyists in stripping out the harshest of the proposals. This story needs to be read widely and followed up by the rest of the press.

Here’s what happened, according to an AP investigation of regulatory documents:

In 2005, faced with ominous signs the housing market was in jeopardy, bank regulators proposed new guidelines for banks writing risky loans. Today, in the midst of the worst housing recession in a generation, the proposal reads like a list of what-ifs:

—Regulators told bankers exotic mortgages were often inappropriate for buyers with bad credit.

—Banks would have been required to increase efforts to verify that buyers actually had jobs and could afford houses.

—Regulators proposed a cap on risky mortgages so a string of defaults wouldn’t be crippling.

—Banks that bundled and sold mortgages were told to be sure investors knew exactly what they were buying.

—Regulators urged banks to help buyers make responsible decisions and clearly advise them that interest rates might skyrocket and huge payments might be due sooner than expected.

Those proposals all were stripped from the final rules. None required congressional approval or the president’s signature.

“In hindsight, it was spot on,” said Jeffrey Brown, a former top official at the Office of Comptroller of the Currency, one of the first agencies to raise concerns about risky lending.

Just when you thought this administration’s legacy could get any worse:

The administration’s blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s.

“Blind eye” is strong for a news story, but there’s no doubt this paragraph is dead right.

The AP reports that regulators were concerned about option ARMs, the adjustable-rate mortgages that started off with a period of interest-only payments, and which have since blown up. But industry lobbying, as usual, got its way with the administration.

As Barry Ritholtz over at The Big Picture says:

The banks that lobbied most aggressively against the rules reads like a who’s who of bankruptcy and FDIC conservatorship: IndyMac, Countrywide Financial, Washington Mutual, Lehman Brothers, and Downey Savings.

This is a devastating story. Let’s hope the press keeps turning over these rocks.