Congress is considering tougher standards for risky, higher-interest home loans made to people with blemished credit records as defaults surge and lenders to the subprime market see their own financing dry up.
Some analysts and executives said lawmakers and regulators missed earlier opportunities to scrutinize the mortgage industry, and they worry that a belated overreaction could make matters worse by choking off funds to the poor and further weakening the housing market.
Lawmakers “did nothing while the industry created this problem,” said Christopher Whalen, a managing director in New York for Institutional Risk Analytics, which analyzes the risk level of companies.
“Now,” he added, “the Congress is going to come out and start wringing their hands and looking for scapegoats.”
Mr. Whalen and others said the government has looked the other way for years as risky loans were made to consumers with shaky financial histories and interest rates were kept at historic lows, fueling speculative real estate investments.
“It’s a big issue because the chickens are coming home to roost and the very loose credit policies that we’ve had are now resulting in a great increase in foreclosures,” said Rep. Paul E. Gillmor, Ohio Republican, adding that it is too soon to say whether new laws or tighter regulations are the best approach to the problem.
The Mortgage Bankers Association yesterday said late mortgage payments shot up to a 3-year high in the final quarter of last year and new foreclosures surged to a record high as borrowers with tarnished credit histories had trouble keeping up with their monthly payments.
The association reported that the percentage of payments that were 30 or more days past due for all tracked loans jumped to 4.95 percent in the last three months of 2006.
The House subcommittee that oversees financial institutions is scheduled later this month to hold a hearing on the mortgage industry’s turmoil. Executives from subprime lending companies could be called to testify at future hearings, congressional staffers said.
Rep. Carolyn B. Maloney, New York Democrat and chairman of the House Financial Services financial institutions and consumer credit subcommittee, plans to introduce a bill that would impose more restrictive mortgage guidelines, including a requirement that lenders consider the ability of a borrower to pay back an adjustable-rate loan over the entire term not just at the beginning, when “teaser” rates are extremely low.
“You can’t hand out loans that people can’t repay,” she said. “It’s bad for the consumer and bad for business.”
Earlier this month, the five federal agencies that regulate banks, thrifts and credit unions called on lenders to exercise caution in making subprime loans and to closely evaluate borrowers’ ability to repay them. Consumer advocates, meanwhile, say mortgage lenders should be required to determine whether a particular loan is suitable for a borrower before they issue it.
Rep. Spencer Bachus, Alabama Republican, who drafted an anti-predatory lending bill last year based on North Carolina and New Jersey laws, called reforms to mortgage practices a “nonpartisan” issue. He noted that lawmakers were close to completing a bill in the fall before negotiations broke down in a dispute about whether fraud victims should be allowed to file class-action lawsuits.
For its part, the mortgage industry plans to resist new regulations, which would be tantamount to “permanent disenfranchisement of a potential group of borrowers,” according to Kurt Pfotenhauer, senior vice president for government affairs at the Mortgage Bankers Association.
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