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A coalition of housing groups and advocates for the poor today said tougher laws are needed to protect consumers from lenders pushing high-interest home loans. They warned of a growing "mortgage tsunami" affecting millions of Americans, particularly minorities.
The National Community Reinvestment Coalition, a network of 640 groups nationwide, said federal bank regulators and members of Congress had ignored warnings for several years about a potential wave of defaults in risky loans.
Some lawmakers are already considering tougher standards for risky, higher-interest mortgages made to people with blemished credit records as defaults surge and lenders to the so-called subprime market see their own financing dry up.
The U.S. Securities and Exchange Commission, meanwhile, is examining accounting errors at New Century Financial, the second-largest subprime lender, which is facing possible bankruptcy. Its bank lenders have cut off funding or informed the Irvine, Calif., company of their intent to do so because of its failure to make payments.
Members of the housing coalition said today that the Federal Housing Administration should work with banks to refinance risky loans with high interest rates in order to help consumers avoid foreclosure.
"We have for many years urged Congress and urged those who are responsible to take action," said John Taylor, the president of the coalition. "Frankly, it's appalling what they haven't done. . . . Today we call on the (Bush) administration and the Congress to take back the reins."
Taylor blasted "exotic nontraditional mortgages that are designed to strip wealth" rather than allow homeowners to build up equity in their properties.
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'This market is clearly broken'
Speaking at the group's annual meeting in Washington, D.C., New York Sen. Hillary Clinton, a Democratic presidential candidate, said lenders should be required to clearly explain the terms of mortgages to borrowers, particularly for loans in which the rate can soar after the first few years."This market is clearly broken, and if we don't fix it, it could threaten our entire housing market, which in turn would threaten our entire economy," Clinton said.
On Capitol Hill, the chief executive of Fannie Mae told lawmakers that the government-sponsored company -- which finances one of every five home loans in the country -- has played a "small, careful" role in the subprime mortgage market to help some low-income homeowners.
Fannie Mae has raised warnings about the potential risks of subprime mortgages, and for the most part, "we have stepped away from it," President and CEO Daniel Mudd testified at a hearing by the House Financial Services Committee. "Others performed the function, and a lot of risk went out into the marketplace."
"Our focus now is on what we can do to help keep people in their homes," Mudd said.
Fannie Mae (FNM, news, msgs) is the largest player in the $8 trillion home-mortgage market. Its government-sponsored rival that is No. 2, Freddie Mac (FRE, news, msgs), said late last month that it will no longer buy those subprime mortgages it deems to be highly vulnerable to foreclosure. The change is planned to go into effect Sept. 1.
An industry in turmoil
Two days ago, the Mortgage Bankers Association said late mortgage payments had shot up to a 3 1/2-year high in the final quarter of last year and that new foreclosures had surged to a record high as borrowers with tarnished credit histories had trouble keeping up with their monthly payments.- Video: Jubak on the credit crunch
The House subcommittee that oversees financial institutions is scheduled later this month to hold a hearing on the mortgage industry's turmoil.
Rep. Carolyn Maloney, D-N.Y., who chairs the House Subcommittee on Financial Institutions and Consumer Credit, 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.
The Bush administration's housing secretary said Wednesday that the government is preparing to punish some subprime mortgage lenders under investigation for discriminatory practices.
The Housing and Urban Development Department also has suggested that Fannie Mae and Freddie Mac consider giving strapped homeowners more time to make their payments, Alphonso Jackson said at a House hearing Wednesday.
"We're doing everything in our power, in our moral persuasion, to try to keep mortgage foreclosures from occurring," Jackson said. "We don't have the power to dictate to them what they should do."
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