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Official calls mortgage crisis ‘far from over’

WASHINGTON – Sept. 6, 2007 – A top Bush administration official Wednesday warned that financial market turmoil had yet to “play out,” as congressional Democrats planned tougher laws for mortgage lending.

Treasury Undersecretary Robert Steel told a House Financial Services Committee hearing that volatility in credit and mortgage markets “is far from over.”

“It will take more time to play out,” Steel said, though adding that he did not foresee a recession.

Meanwhile a key Senate Democrat proposed a plan to bar lenders from steering borrowers to high-cost products or imposing penalties for early loan repayment.

Rising defaults in subprime mortgages – higher-cost loans to borrowers with impaired credit – have sparked investor concerns about the possible riskiness of other financial products. That has led to a sharp contraction in credit markets, driving up prices and restricting availability of loans.

The White House, Federal Reserve and Congress are working on several fronts to address the issue: helping many of the estimated 2 million or more borrowers at risk of foreclosure, setting tighter standards for future lending and trying to unfreeze credit markets. While committee Democrats and Republicans disagreed on the need for new laws, panel chair Rep. Barney Frank, D-Mass., said that, overall, the market turmoil was easing resistance to tougher oversight.

“One of the arguments that we got against regulation (is that) you will impinge on the market, you will kill that market,” Frank said.

Frank has not spelled out legislation, but Senate Banking Committee Chairman Chris Dodd, D-Conn., laid out his plan Wednesday.

Under Dodd’s proposal, subprime lenders would be barred from imposing penalties for early loan repayment. Lenders would have to base adjustable-rate loans on a borrower’s ability to pay after a mortgage resets at a higher interest rate and could not offer loans without income documentation, except in unusual circumstances. His plan would provide more aid to groups working to stave off foreclosure and address issues in appraisal and loan servicing areas.

“Affordable home loans are a good thing; predatory lending is not,” said Dodd, a Democratic presidential hopeful.

Erik Sirri, director of market regulation for the Securities and Exchange Commission, told the House hearing that the SEC had stepped up oversight of agencies that rated bonds backed by subprime mortgages, looking at potential conflicts of interest and disclosure issues.

The regulators said federally overseen banks were in good financial shape. But they said market turmoil was boosting credit risks.

Copyright 2007 USA TODAY, a division of Gannett Co. Inc., Sue Kirchhoff.