Senator: Mortgage Loan Practices “Out of Balance”

U.S. mortgage lender practices are “out of balance” and need to protect minority borrowers and those with less than pristine credit, according to Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee.

Lawmakers and many witnesses testifying at a hearing dubbed “Preserving the American Dream” focused on borrowers who have been harmed by so-called subprime (or bad credit home loans), which are traditionally higher cost loans aimed at borrowers with less than perfect credit.

Dodd, a Democrat from Connecticut, said he saw signs that homeownership is under grave threat from predatory, abusive, and irresponsible home mortgage lending practices undertaken by too many subprime lenders.

In the U.S., foreclosure filings were up 42 percent in 2006 from a year ago in large part because of weakness in the bad credit mortgage market, Dodd said, citing research from RealtyTrac.

Civil rights leader Jesse Jackson, who was called a witness at the hearing, cited statistics that 52 percent of mortgage loans to African Americans were “high-rate” (or above the prime rate) in 2005.

By contrast, 19 percent of mortgage loans to whites were high-rate.

“Lenders and brokers have financial incentives to place borrowers in more expensive home loans,” Jackson said.

During a five-year housing boom that ended in the summer of 2005, many subprime lending institutions eased standards to many borrowers.

“Subprime credit can be a valuable tool in helping many people become homeowners, but the system is out of balance,” Dodd said.

He said he looked forward to working with mortgage brokers, bankers, home loan regulators and Wall Street to “restore this balance for the sake of the safety and soundness of the banking system.”