Regulators Say They Lacked Authority Over Some Areas In Subprime Mortgage Crisis

Thursday, March 22nd 2007, 11:29 am

By: News On 6

WASHINGTON (AP) _ Federal regulators said Thursday they lacked authority over expanding areas of the high-risk mortgage market as lawmakers pressed them on whether they were lax and helped fuel the spike in delinquent payments and foreclosures.

Officials from the Federal Reserve and several other federal agencies that regulate banks and thrifts sought to avoid blame in the hearing before the Senate Banking Committee. Some of the biggest companies in the so-called subprime mortgage market also were called to account as turbulence swirls in the market, recently roiling Wall Street and helping push the Dow Jones average to its lowest levels in more than four years.

There has been anxiety in the financial markets that the distress could spill over into the broader economy.

``I want to emphasize that national banks are not dominant players in the subprime market,'' testified Emory Rushton, senior deputy comptroller in the Treasury Department's Office of the Comptroller of the Currency, which regulates nationally chartered banks.

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

A patchwork of federal and state regulatory agencies hold jurisdiction over financial companies, putting many subprime mortgage lenders outside of stringent regulation, Rushton and other regulators said.

Sen. Christopher Dodd, D-Conn., the committee's chairman, laid out what he called a ``chronology of regulatory neglect'' as banks and other lenders loosened their standards for making riskier mortgage loans during the housing market boom in late 2003 and early 2004. He blamed the Fed and other regulators for setting off the crisis in subprime loans, which are higher-priced home loans for people with tarnished credit or low incomes who are considered at greater risk of default.

Now, some 2.2 million homeowners could lose their homes in the next few years, said Dodd, who is a contender for the Democratic presidential nomination in 2008.

``Our nation's financial regulators were supposed to be the cops on the beat, protecting hardworking Americans from unscrupulous financial actors,'' Dodd said. ``Yet they were spectators for far too long. ``

Foreclosures have accelerated in recent months, especially among homeowners who took out subprime loans, raising worries that many people could lose their homes as mortgage delinquencies mount and distress grows in the market for subprime mortgages.

Senior Democrats are drafting legislation intended to curb predatory lending, which occurs, for example, when lenders pressure home borrowers into high-interest loans that they may not be able to repay.

Mortgage industry executives are warning against what they say could be a harmful overreaction by Congress that would upset the markets and dry up home-loan credit for the people who need it most.

New legislative or regulatory restrictions ``could actually harm the consumer by restricting the choices of loan products, terms and (lenders) available in the market,'' Harry Dinham, president of the National Association of Mortgage Brokers, testified at a House hearing on Wednesday.

Earlier this month, the Fed and the other four federal agencies that regulate banks, thrifts and credit unions called on lenders to exercise caution in making subprime mortgage loans and strictly evaluate borrowers' ability to repay them. The regulators said the guidelines, if formally adopted by the agencies and followed by lending institutions, could result in fewer borrowers qualifying for subprime loans.

Dodd said he wanted to know why it took the regulators more than three years to act ``despite evidence that they themselves identified problems in the subprime market.''

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