Senate told to brace for more mortage turmoil

By WIRE SERVICES

As a basket of regulations, industry agreements and legislation is being set in motion to address the subprime lending crisis, a federal official told the Senate Banking Committee to brace for more turmoil.

At a hearing on U.S. home foreclosures Jan. 30, U.S. Federal Deposit Insurance Corp. Chairman Sheila Bair told the Senate Banking Committee that foreclosure rates were too high and warned of a new wave of troubled mortgages coming in next year and in 2009.

U.S. foreclosures totaled about 1.1 million in the first three quarters of 2007, a 60 percent jump from the previous year, Bair said. Some 1.3 million subprime hybrid mortgage loans are slated to reset in 2008 and another 422,000 loans in 2009, Bair said.

An industry plan announced by the Bush administration in December aims to temporarily freeze low introductory or teaser rates for five years for borrowers with tainted credit histories.

On Dec. 18, in a bid to end the sale of deceptive home mortgage loans to people with weak credit and other risk factors, the Federal Reserve proposed a broad set of rules that would curtail predatory lending practices by lenders and mortgage brokers.

The regulations would also limit mortgages with future monthly payments beyond those that could be justified by a borrower's projected earnings. And they would place limits on penalties for borrowers who repay their debts.

The regulations are expected to be approved after a three-month period for public comment.

Last month, the House passed a bill sponsored by Massachusetts Democrat Barney Frank that would impose tough restrictions on many subprime practices, including those requiring lenders to ensure borrowers are given loans they can afford to repay. It would also strengthen oversight of mortgage brokers.

A similar bill is pending in the Senate.

Senate Banking Committee Chairman Christopher Dodd said more help is need ed for homeowners facing foreclosures.

Dodd, a Connecticut Democrat, favors creating a new entity, the Home Ownership Preservation Corp., to help troubled borrowers get new, lower-balance loans and stay in their homes.

According to the National Association for the Advancement of Colored People, African-Americans hold more than half of the subprime mortgage loans at risk of foreclosure. And blacks and Latinos are far more likely to be issued high-cost home purchase loans than white buyers.

A shaky house of cards

How the subprime mortgage crisis has hurt the overall economy:

1 Subprime mortgages

Banks, mortgage companies and other financial institutions make higher-interest loans to real estate buyers with weak credit or low credit ratings

2 Investments

Lenders bundle loans and sell the package to a government-related agency, such as Fannie Mae or Freddie Mac, or to a private investment firm

3 Investors

Agencies or firms create a security (bond), backed by the underlying mortgage payments, and sell the security to investors

4 Failing mortgages

Irresponsible lending practices and rising rates resulted in more defaults among those with subprime mortgages, and holders of mortgage-backed securities saw their assets lose value; some of the biggest corporate investors took billion-dollar write-offs

5 'Credit crunch'

As a result of their losses, financial institutions began tightening lending standards, making borrowing less easy; stock markets and consumer confidence slipped

6 Sluggish economy

Tight credit threatens to push the U.S. recession by slowing economic activity

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Source: Detroit Free Press Graphic: Photo illustration by Mary Schroeder and Martha Thierry, Detroit Free Press

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