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The Federal Reserve helped create a "perfect storm"

April 3rd, 2007 8:03 PM by Ron Mastrodonato

The Federal Reserve helped create a "perfect storm" in the US
subprime mortgage market that could expose up to 2.2m more Americans
to the threat of home repossession, Chris Dodd, chairman of the
Senate Banking committee, said on Thursday.

Mr Dodd, who is also a Democratic party candidate for the 2008
presidential nomination, alleged that the Fed had failed in its
oversight role at a time when the growth in high-risk "adjustable
rate mortgages (ARM)" to risky borrowers was exploding.

In a tough interrogation of leading mortgage lenders and federal
banking regulators, Mr Dodd also promised legislation to crack down
on predatory lending in the US mortgage market, where a rising level
of repayment delinquency has caused global market jitters over the
past month.

Mr Dodd said that US regulators had relaxed guidelines on mortgage
lending at precisely the point in 2004 and 2005 when the riskiest
ARM loans – which impose initially light monthly payments that
escalate rapidly at a later date – were growing most rapidly. This
also coincided with the start of the Fed's consecutive 17-stage rise
in US interest rates.

"Despite those warning signals  . .  .& #8201;the leadership of the Federal
Reserve seemed to encourage the development and use of ARMs that,
today, are defaulting and going into foreclosure at record rates,"
he said.

Mr Dodd, who was supported by Richard Shelby, the senior Republican
on the committee, also expressed frustration with the fact that the
Fed had so far failed to issue promised new guidance that would
tighten up controls on the $1,200bn subprime mortgage market.

An estimated 1m subprime borrowers will have their rates adjusted
sharply upwards this year and another 800,000 next. Roger Cole, a
senior Fed official, said the guidance would come out by May at the
earliest. He conceded that the Fed could have done more.

Thursday's hearing could mark the start of a political backlash
against the leading subprime mortgage lenders. Senior executives
from four leading lenders – HSBC, Countrywide, WMC Mortgage, First
Franklin – testified. Of those invited, only New Century, the
largest subprime lender, failed to send a witness.

Mr Dodd said the lenders had engaged in "unconscionable and
deceptive" practices. But he also admitted it would be hard to pass
a stricter law.

Subprime lending reached a new peak last year at 22.3 per cent of
total mortgage originations, driven by loans that offered homebuyers
special teaser rates that surged during the life of the loan.
Posted in:General
Posted by Ron Mastrodonato on April 3rd, 2007 8:03 PM


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