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THE MORTGAGE MELTDOWN

Fallout hits lenders on Capitol Hill

Senate panel blames mortgage executives and regulators for a system based on low standards.

March 23, 2007|Jonathan Peterson | Times Staff Writer

WASHINGTON — Nearly everyone agrees that the sub-prime lending industry is in crisis.

Now, what to do about it?

On Capitol Hill Thursday, lawmakers, regulators and mortgage industry executives jousted over the best way to curb shaky lending practices without putting homeownership out of reach for millions of Americans.

"That is the concern," Sandor E. Samuels, executive managing director of Countrywide Financial Corp. of Calabasas, told the Senate Banking Committee. Borrowers might be rejected, he added, even though "we have a good idea that they can be successful in their loan."

The Senate panel met as communities across the nation struggled with rising loan defaults and home foreclosures -- the legacy of loose lending standards for people with marred credit or unreliable income.

Thousands of mortgage industry workers have lost their jobs in the meltdown. The latest casualties came Thursday at Burbank-based WMC Mortgage, where 500 people reportedly lost their jobs as Chief Executive Laurent Bossard appeared before the Senate panel.

Committee Chairman Christopher J. Dodd (D-Conn.) criticized lenders for extending so-called sub-prime mortgages to people who could not afford the higher payments that came after initial teaser rates expired. But he reserved his harshest criticism for federal banking regulators, saying they failed to heed warnings that tougher lending standards were needed.

Under questioning from lawmakers, a Federal Reserve official conceded that regulators did not act quickly enough to curb risky lending practices that became common in recent years.

"Given what we know now, yes, we could have done more sooner," said Roger T. Cole, the Fed's director of banking supervision and regulation.

Dodd characterized the Fed's defense as "weak" in comments to reporters later and said he wanted to convene a national summit to find a way to help the growing number of borrowers who are in danger of losing their homes. That group has been estimated at more than 2 million by the Center for Responsible Lending, an advocacy group.

Industry critics say massive foreclosures would not be looming if lenders had taken more care in the approval process.

Instead, they say, mortgage companies handed out loans like candy to people without the means to make payments. With home prices leveling off or declining, many of these borrowers are no longer able to refinance their loans.

Samuels and other executives countered that regulators need to strike the "right balance" between good standards and flexible terms that enable people of modest means to buy homes.

For example, overly strict standards could force borrowers into fixed-rate loans even if they don't plan to remain in the same house for many years, said L. Andrew Pollock, CEO of First Franklin Financial Corp.

"We should be cautious as we go down this path," he said.

Dodd and other lawmakers, however, contend that the problem was not enough caution.

As of late last year, more than 13% of borrowers with high-cost loans had fallen behind on their payments, the highest delinquency rate since September 2002, according to the Mortgage Bankers Assn.

Industry analysts say the problem could worsen as short-term "teaser rates" on adjustable loans expire and the mortgage payments escalate. About 1 million mortgage loans are due to reset this year, followed by 800,000 next year, according to the Federal Deposit Insurance Corp., which insures deposits in banks and thrift institutions.

In light of such numbers, lawmakers Thursday focused particular criticism on banking regulators, including the Fed and Comptroller of the Currency.

"It just seems to me that you all were asleep at the switch," said Sen. Robert Menendez (D-N.J.).

Dodd, who is seeking the Democratic presidential nomination, noted that Fed staffers were well aware of declining lending standards as far back as 2003. He also criticized former Fed Chairman Alan Greenspan for encouraging adjustable-rate loans just as the Fed was embarking on a course of 17 interest-rate hikes, making these loans more costly.

Finally, Dodd said the Fed made no effort to oversee mortgage companies that were not banks but became major players in the sub-prime market. The Fed has the authority to set rules prohibiting "unfair or deceptive" practices by all lenders under the Home Ownership and Equity Protection Act of 1994.

"The obvious question here is, why hasn't the Fed acted?" Dodd said.

The Fed's Cole said regulators were mindful that their actions had the potential to cut off credit to deserving borrowers.

U.S. banking regulators this month proposed new standards for the high-cost loans. They call for assurance that lenders provide loans only to borrowers who can afford the fully adjusted rate and firmer requirements for documenting borrowers' income. But the proposed reforms came too late to stave off rising loan defaults.

jonathan.peterson@latimes.com

Times staff writer E. Scott Reckard contributed to this report.

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