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Subprime loans may get new rules

The Federal Reserve, pressured by Congress, looks to curb abuses.

Associated Press
Published June 15, 2007


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WASHINGTON - Federal Reserve governor Randall Kroszner said Thursday that the central bank may use its legal authority to crack down on mortgage-lending abuses.

As pressure builds on the government to do something about the troubled home-loan market, the Fed held an all-day hearing to discuss the possibility of writing rules to ban or restrict questionable practices in the market for high-risk, or subprime, mortgages.

The hearing came one day after Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, threatened to strip the Fed of its authority to write rules against home-lending abuses if the central bank does not act quickly.

"We must walk a fine line," Kroszner said. "We must determine how we can help to weed out abuses while also preserving incentives for responsible lending." Kroszner added that improvements are needed in the way home-loan terms are disclosed to consumers.

"This is a moment of great concern in our economy as to whether subprime is going to pull us all down," said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business.

Nearly 2-million adjustable-rate mortgages are resetting to higher rates this year and next, setting up a potential new wave of foreclosures with uncertain economic impact.

Actions being considered by the Fed include the following:

- Limiting the use of so-called "liar loans" that do not require proof of a borrower's income.

- Barring subprime lenders from imposing financial penalties for borrowers who make early payments.

- Pushing lenders to require set-aside payments for taxes and insurance.

At Thursday's meeting, industry executives urged the board not to overreact to the problems in the market. Consumer groups - exasperated by what they see as a lack of action among regulators and lawmakers - said the central bank bore some of the blame for the market's problems, arguing it should have cracked down on abusive mortgage practices years ago.

"We hope that, finally, serious action can be taken, because nibbling around the edges is not going to solve this problem," said Alys Cohen, a staff attorney at the National Consumer Law Center.

Fast Facts:

Subprime ARM loan crisis deepens
Late payments and new foreclosures on adjustable-rate home mortgages made to people with spotty credit histories spiked to all-time highs in the first three months of this year. The Mortgage Bankers Association, in its quarterly snapshot of the mortgage market released Thursday, reported that the percentage of payments that were 30 or more days past due for "subprime" adjustable-rate home mortgages jumped to 15.75 percent in the January-to-March quarter, above the prior quarter's delinquency rate of 14.44 percent. The percentage of subprime adjustable-rate mortgages that started the foreclosure process in the first quarter of this year climbed to a record 3.23 percent, up from 2.70 percent in the fourth quarter of 2006.
Associated Press

[Last modified June 14, 2007, 23:15:06]


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