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Rising mortgage delinquencies could especially hurt low-income families

WASHINGTON (AP) Mortgage delinquency and foreclosure rates are on the rise, and the impact could be greatest on low-income families that took out higher-interest loans for risky borrowers, some experts said Monday.

Treasury Secretary Henry Paulson said the government wants to issue guidelines to banks and savings and loans that will allow people to get home loans ``without taking unnecessary risks.''

``Expanding opportunities for more people to buy a home is a good thing. But we do not want Americans to become overextended and see their dream end in foreclosure,'' Paulson said at a conference on the housing market organized by the Office of Thrift Supervision, a Treasury Department agency.

Some experts are concerned that the increase in mortgage foreclosure rates could affect the banking system's financial health.

There have started to be ``early signs of credit distress'' in financial institutions' holdings of so-called ``subprime'' mortgages, especially in California, Richard Brown, chief economist for the Federal Deposit Insurance Corp., said at the conference.

In the sizzling housing boom that waned in the latter half of last year, many people took out subprime mortgages, higher-interest loans for people with blemished credit records who are considered higher risks, with adjustable interest rates.

When interest rates rise, as happened last spring, it can raise monthly payments for people with adjustable-rate mortgages, potentially creating a strain if they stretched to buy a home and don't have a financial cushion in their savings.

William Longbrake, a senior policy adviser to the Financial Services Roundtable, an industry group, said he is among a minority of experts ``who believe the worst is still ahead in the housing market'' for home prices to continue to fall.

``There is worse to come. ... The bottom is probably still many months ahead,'' Longbrake said. He noted that the rise in delinquencies and foreclosures in subprime mortgages particularly affects low-income families.

Mortgage defaults could snowball in the coming months, a situation that bears close watching, he said.

The Mortgage Bankers Association reported in September that mortgage foreclosures climbed in the second quarter as higher interest rates and energy prices made monthly payments harder for some homeowners.

The percentage of mortgages that went into the first stages of the foreclosure process in the April-to-June quarter rose to 0.43 percent, up from 0.41 percent in the first quarter and the highest level in just over a year. Foreclosure rates were highest for subprime borrowers.

Also in September, the federal banking regulators directed financial institutions to properly explain the risks posed to borrowers from interest-only and other nontraditional mortgages. Such mortgages have exploded in popularity in recent years and raised concern that there could be a sizable number of defaults if borrowers cannot meet rising mortgage payments.

The regulators also said banks must make sure the loans they made were ``consistent with prudent lending practices, including consideration of a borrower's repayment capacity.''

Paulson said Monday the Treasury Department wants to ``make sure that we have the right guidance in place to help people access home financing without taking unnecessary risks.''
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