White House proposals target risky mortgage practices
The Bush administration announces a series of measures that will focus on improving weakened standards in lending.
WASHINGTON -- Working to stabilize the financial markets, the Bush administration announced a series of new proposals today designed to curb risky mortgage practices and help Wall Street cope with the fallout in credit markets.
Treasury Secretary Henry M. Paulson Jr. blamed a "dramatic weakening of underwriting standards" for triggering the collapse of the sub-prime mortgage market, which has spread through the rest of the credit markets, making loans virtually unavailable and led to large write-downs of mortgage losses by major financial institutions.
"Weaker sub-prime credit standards were part of a much broader erosion of standards throughout corporate and consumer credit markets," Paulson said in a speech outlining the new measures. "We have had a number of years of benign economic financial conditions and abundant liquidity; investors reached ever further for yield, and market participants and regulators became complacent about all types of risks."
The proposed measures were largely in line with plans already accepted by mortgage lenders and financial institutions, including regulating mortgage brokers and ensuring that credit ratings more accurately reflect risk to investors.
The stock market continued its roller-coaster reaction to bad economic news, with the Dow Jones industrial average dropping nearly 200 points in the first hour of trading this morning before recovering slightly.
The index had risen more than 400 points earlier in the week on news that the Federal Reserve would lend about $200 billion to financial institutions to shore up their balance sheets, but appeared unnerved today by a further decline in the value of the dollar, retail sales reports that were lower than expected, and the nearing collapse of Carlyle Capital Corp., a mortgage bond fund.
Paulson indicated that the administration is also concerned about the new dangers to the economy from the weakness of mortgage bond funds like Carlyle, which held about $21 billion in mortgage-backed securities.
"There is a certain irony that during this period it has been the regulated financial institutions which have been the focus of our attention," Paulson said. "With a few exceptions, the hedge fund sector thus far has proven resilient to market volatility and protracted illiquidity. We know that a number of hedge funds are now also facing difficulties, as some are missing margin calls, and we are monitoring that closely."
