Federal Reserve: Bad Credit Mortgage Loan Problems to Last Two More Years

The Federal Reserve is concerned that borrowers of bad credi mortgage loans may face “more difficulty” in the next one to two years, an official said Tuesday.

In particular, those borrowers with recently originated adjustable-rate mortgages are likely to experience more delinquencies and foreclosures, said Sandra Braunstein, the director of the Fed’s division of consumer and community affairs.

In testimony before a House Financial Services subcommittee, Braunstein also said incentives for responsible subprime lenders need to be preserved so that access to credit can be maintained.

However, facing close questioning by lawmakers, regulators largely dismissed the need for new legislation to combat problems in the subprime market.

“What is there now is appropriate,” Braunstein said.

Office of Thrift Supervision Director John Reich said the market “is in the process of correcting itself,” but that lawmakers should extend recently issued federal proposals to tighten rules on subprime lending to all lenders, not just federally insured institutions.

Banking regulators demanded tougher standards for subprime home loans in proposed guidance earlier this month. Meanwhile, Reich said “contagion” hasn’t yet spread to other sectors of the housing sector from the shake-out in the industry.

“There do not appear to be forces that would result in contagion to other aspects of the housing industry and mortgage lending,” he said.

However, lawmakers peppered regulators with questions about what went wrong in the market and how to ensure it doesn’t happen again.

Rep. Carolyn Maloney, the New York Democrat who chairs the committee’s financial institutions and consumer credit subcommittee, said she wished regulators would have acted sooner to correct problems in the market.

Rep. Spencer Bachus, R-Ala., said lawmakers should tighten rules on more mortgage brokers. But he said any new rules should protect access to credit.

“The last thing we need at this point is ill-conceived legislation that dries up credit availability to ordinary Americans while worsening the current market downturn,” Bachus said.

Tuesday’s hearing is second in less than a week about the subprime market, which has fallen into crisis as several lenders specializing in mortgages to buyers with lower credit scores have gone bust.

Last year, subprime mortgages were a $600 billion business that accounted for about a fifth of all home loans, according to industry publisher Inside Mortgage Finance. But the sector has spiraled into a crisis as borrowing costs have climbed and the U.S. housing market has cooled.

Braunstein said the Fed is also reviewing whether it can beef up its authority to stop deceptive and unfair lending practices by federally and state-regulated mortgage lenders.

Rushton noted that national banks produced less than 10% of all new subprime mortgages in 2006, but said that national banks should work with troubled borrowers to resolve their problems

SOURCE: Marketwatch