Subprime damage is called limited

Mortgage problems should not hurt U.S. economy, regulator says

March 23, 2007|By Marilyn Geewax | Marilyn Geewax,Cox News Service

WASHINGTON -- Although more and more Americans are failing to keep up with rising mortgage payments, turmoil in the subprime lending market probably won't harm the nation's major banks or the broader economy, a top banking regulator told Congress yesterday.

"At this time, we are not observing spillover effects from the problems in the subprime market to the traditional mortgage portfolios or, more generally, to the safety and soundness of the banking system," said Roger Cole, director of the Federal Reserve's Division of Banking Supervision and Regulation.

Still, federal regulators said they should have had more authority to crack down on the high-risk mortgage market, and should have been more aggressive in using what powers they did have to prevent problems. "Given what we know now, yes, we could have done more sooner," Cole told the Senate banking committee.

Subprime lenders offer mortgages to people with spotty credit records or irregular income. Typically, such mortgages have provisions that keep the interest rates ratcheting higher over time.

Since 2005, growing numbers of homeowners have been defaulting on their increasingly expensive mortgage payments, forcing dozens of lenders to shut down or sell themselves to other institutions.

According to the Federal Deposit Insurance Corp., between 2003 and 2005, the prevalence of subprime loans among all mortgages shot from 9 percent to 19 percent. Today, about 14 percent of subprime mortgage payments are 60 or more days past due.

Sandra Thompson, director of supervision and consumer protection at the FDIC, said lenders currently have $1.28 trillion in subprime loans outstanding.

The interest rates on about 1 million of those loans are scheduled to reset this year and another 800,000 next year, so payment delinquencies likely will continue to rise, Thompson said.

Sen. Christopher J. Dodd, a Connecticut Democrat and chairman of the committee, detailed what he called a "chronology of regulatory neglect" that began in late 2003 as the housing market boomed.

For the next two years, banks and other lenders relaxed standards for giving loans to prospective homeowners.

Today, with the housing market slumping, about 2.2 million homeowners are in danger of losing their homes over the next few years, Dodd said. "Our nation's financial regulators were supposed to be the cops on the beat, protecting hard-working Americans from unscrupulous financial actors," Dodd said. "Yet they were spectators for far too long."

Emory Rushton, senior deputy comptroller in the Treasury Department's Office of the Comptroller of the Currency, said the nationally chartered banks that his agency closely regulates did not make many of the high-risk mortgages. Instead, most subprime mortgages came from lenders covered by a hodgepodge of federal and state regulatory agencies with less strict standards.

"Unfortunately, regulatory oversight tends to be less rigorous in precisely those parts of the financial system where subprime practices seem most problematic," Rushton said.

Sandor Samuels, the executive managing director for Countrywide Inc., the largest U.S. mortgage lender, said subprime mortgage defaults for 2006 loans likely would exceed the company's previous record.

Countrywide's "worst single origination year was 2000, for which the cumulative foreclosure rate was 9.89 percent," Samuels said. "We believe that declining home prices and other factors ... may produce foreclosures numbers on 2006 originations approaching or exceeding those on loans originated in 2000."

Joseph Smith, a representative of the Conference of State Bank Supervisors, said the mortgage market generally is strong even if some individual subprime lenders are suffering financial losses. He urged Congress not to try to bail out the subprime lenders and brokers who made excessively risky loans.

Dodd said he plans to move legislation to crack down on "predatory" lending, but he does not want to discourage responsible subprime lending, which can help poorer people buy a home.

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