Mortgage Regulators Grilled By Senate Committee
Banking regulators came under fire in the U.S. Senate Thursday, facing a barrage of pointed questions on why they didn’t do more to stave off what has become a bona fide bad credit mortgage crisis.
A senior staffer for the Federal Reserve, Roger T. Cole, was particularly singled out at the hearing, conducted by the Senate committee in Banking, Housing and Urban Affairs.
Several senators asked why the Federal Reserve didn’t do a better job heading off a reduction in underwriting standards and the spread of “exotic” mortgage products, such as so called “explosive ARMs” and negative amortization loans.
Robert Martinez, Democrat from New Jersey, claimed the Fed was “asleep at the switch” when it should have been using broad regulatory power to enforce home loan lender and broker practices that were smarter.
Cole admitted some responsibility lay with the Fed. “Given what we know now,” he said, “we could have done more, sooner.”
Cole said the Fed has taken just three formal and three informal actions against substandard lenders in the past five years, but he noted that it does engage in other actions to attempt to bring mortgage loan companies in compliance with optimal business practices.
A lot of it is in educational and outreach programs.
The Florida Republican, Mel Martinez, was not satisfied. He wondered how bank regulators could have allowed so many bad loans to be written.
This year alone, according to the testimony of Sandra Thompson, Director of the Division of Supervision and Consumer Protection for the FDIC, over one million subprime ARMs will reset this year and 800,000 more in 2008.
Many of the borrowers of these home mortgage loans will be unable to keep up with them once they reset, experts warn.
Most are 2/28 or 3/27 ARMs, which offer a low initial interest rate the first two or three years before resetting to much higher rates, adding hundred of dollars to monthly payments.
The charge from the U.S. Senate panel is that prudent underwriting practice requires that lenders only make loans to those borrowers who are able to afford them even after the loan resets at higher mortgage rates.
Recent surveys project that as many as 2.2 million subprime borrowers are at risk of defaulting on their home loans and losing their properties.
Cole also said the Federal Reserve has not seen signs that the subprime problems are not affecting other areas of the economy.
“At this time we are not observing any spillover effects from the problems in the subprime market to the traditional mortgage portfolios or, more generally, to the safety and soundness of the banking system,” Cole said.
Scott Polakoff, deputy director of the Office of Thrift Supervision, told the committee that thrifts with significant subprime lending operations were “generally well capitalized.”
Joseph Smith, North Carolina’s commissioner of banks, said the overall U.S. mortgage market is still strong, even if some large providers of bad credit mortgage loans suffer financial losses.
A rep from the Conference of State Bank Supervisors told Senate committee members that Congress should not bail out subprime lenders and mortgage brokers who made risky mortgage loans to borrowers with bad credit.
SOURCE: CNN Money