- The Washington Times - Thursday, March 22, 2007

Senate Banking Committee members yesterday castigated the Federal Reserve and other regulators for not moving forcefully and fast enough to stop the loose lending practices that led to today’s record home foreclosures and told regulators they should put a halt to loans that people can’t afford.

“I don’t want this to go on any longer — this has got to stop,” said committee Chairman Christopher J. Dodd, Connecticut Democrat, referring to the widespread practice among lenders of qualifying borrowers for loans with low introductory interest rates that later surge and make monthly payments unaffordable — forcing homeowners into default and foreclosure.

“It just seems to me you all were asleep at the switch,” said Sen. Robert Menendez, New Jersey Democrat.

Countrywide Financial, the nation’s largest mortgage lender, said if the stricter standards had been applied during the housing boom, about half of subprime loans would not have been made. The company warned that the market already is restricting loans for many homebuyers because of increased defaults, and any further crackdown by regulators risks shutting down the credit market, undercutting the housing market and accelerating defaults.

“These loans are a valuable tool for our customers to afford a first home or as a bridge to overcome temporary financial setbacks,” said Sandor Samuels, executive managing director at Countrywide. If they’re no longer able to qualify, that could “materially reduce housing demand,” he said.

“An appropriate balance must be struck between maintaining affordability and lessening payment shock. Wherever you draw the line, someone will be shut out of the market.”

Roger Cole, the Federal Reserve’s director of banking supervision and regulation, said regulators were slow to react to abuses in mortgage lending that surfaced during 2003 and 2004. Regulators first issued regulatory “guidance” on the matter in December 2005.

“Given what we know now, yes, we could have done more sooner,” he said. The Federal Reserve and other banking regulators said they have acted publicly and privately against questionable bank practices but that the biggest abuses are beyond their reach, among the 80 percent of subprime brokers and lenders they do not regulate.

A small percentage of national banks and thrifts offer subprime loans, so the breakdown of the market poses little risk to the safety and soundness of the banking system, they said. The Federal Reserve also has been wary of doing anything that would pose a crushing blow to the housing market, which has been a major drag on the overall economy and collapsed last year despite the continued availability of easy credit.

“Credit risk is a very important topic,” Federal Reserve Chairman Ben S. Bernanke said at a separate forum yesterday, adding that the smooth flow of credit is “essential for a healthy economy.”

Many economists think the Federal Reserve moved on Wednesday to suspend further interest rate increases out of concern that the mortgage credit crunch will accelerate the decline of housing and threaten the economic expansion.

The regulatory “guidance” to banks, which was adopted by many states but appears to have had little effect on lending practices, recommended that lenders ensure borrowers can pay for loans once their interest rates rise to market levels and principal payments are added in.

Mr. Dodd said the guidance did not go far enough and has put 2.2 million borrowers at risk of losing their homes. He said the Federal Reserve should have triggered a provision of law enabling it to apply the regulations to state banks as well as federal banks.

“It’s not a request, it’s a demand in many ways,” he told Mr. Cole. “Regulators were supposed to be the cops on the beat, protecting hardworking Americans from unscrupulous financial actors. Yet they were spectators for far too long.”

Sandra Thompson, a director at the Federal Deposit Insurance Corp., said she expects delinquencies to grow among the estimated $1.28 trillion of subprime loans outstanding. The interest rates on about 1 million loans are scheduled to rise this year and 800,000 next year, she said.

The delinquencies so far are just “the tip of the iceberg,” said Sen. Richard C. Shelby, Alabama Republican. “This will be the beginning of a real crisis that could continue to creep and creep and creep. We’re not doing the average American any favor if we put them in a house that they’re going to lose.”

State regulators — who have primary jurisdiction over the army of mortgage brokers making the riskiest loans — also came under fire at the hearing.

Joseph Smith, North Carolina’s commissioner of banks, said that while there were weaknesses in regulation at the state level, lenders and investors also were not doing their jobs.

“What has been stunning to me is: Where is the market discipline?” he said. “We did assume naively that up the line, lenders and securitizers were doing due diligence” to ensure the mortgages could be repaid. Most of the risky loans were repackaged and sold to investors by the original lenders.

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