WASHINGTON — The Federal Reserve clamped down hard on mortgage lenders Monday, issuing rules designed to curb the sorts of risky and deceptive lending practices that helped trigger the subprime mortgage crisis.
The Fed's action, although criticized by some for not going far enough, was widely seen as a crucial step in reasserting control over a financial market that had been allowed to run wild.
For The Record
Los Angeles Times Saturday, July 19, 2008 Home Edition Main News Part A Page 2 National Desk 1 inches; 38 words Type of Material: Correction
Mortgage lending rules: A July 15 article in Section A on new Federal Reserve rules for mortgage lenders, and an accompanying list, said the regulations would take effect Oct. 1. The rules go into effect Oct. 1, 2009.
"There's lots more to come," said Thomas Lawler, a former Fed official who is now a housing market consultant. "The pendulum is clearly swinging toward more regulation and more government involvement."
The central thrust of the new rules is to restore sound underwriting practices, such as requiring lenders to verify that borrowers actually have the income and assets to make their loan payments.
The regulations adopted Monday were significantly stiffer than draft proposals issued six months ago, reflecting regulators' intensifying concern over the fallout from the free-for-all lending that helped create the bubble in home values and led to the mortgage meltdown.
The government is stepping up efforts to prop up a housing market battered by loan defaults and foreclosures. Those efforts produced results Monday, as news of a government rescue plan helped mortgage giant Freddie Mac complete a closely watched $3-billion sale of debt.
The sale came a day after the Bush administration said it would seek congressional approval to temporarily boost the Treasury Department's lines of credit for Freddie Mac and fellow mortgage finance company Fannie Mae, and to take the rare step of investing in their stocks if necessary. The Fed also said it would extend loans to the companies.
The moves were designed to give Fannie and Freddie the cash they needed to buy mortgages issued by lenders and resell them to investors. Last week, shares of both companies lost almost half their value amid sudden concerns that the companies wouldn't have enough capital to withstand the mortgage downturn.
"They had no choice except to step into the breach," said Vincent Reinhart, a former Fed official now at the American Enterprise Institute for Public Policy Research. "The entities have gotten too big to fail and so they can't fail."
Tom di Galoma, head of U.S. government bond trading at Jefferies & Co., said there was "a tremendous amount of demand" for the Freddie Mac bonds, a sign that the companies "can weather any kind of near-term" concerns about their financial health.
