Fed to Protect Homeowners from Mortgage Abuse

[Jul 25, 2007.]

The chairman of the Federal Reserve Board is determined to ensure that prospective homebuyers are shielded from lending practices that could be considered abusive—a move that some legislators say is long overdue.

In an appearance before the Senate Banking Committee, Ben Bernanke said, "A lot of the subprime mortgage paper is not, you know, as good as was thought originally." Bernanke said there will probably be serious financial losses as a result of homeowner delinquencies. Subprime-connected credit losses could run in the neighborhood of $100 billion.

Subprime mortgages are offered to borrowers with troubled credit histories. Both investors and legislators are concerned that, in the past, the Federal Reserve Board has been negligent in overseeing the subprime market. Subprime mortgage holders are finding it increasingly difficult to make payments, resulting in an upsurge in late payments and foreclosures. In fact, Bernanke said the troubles are "likely to get worse before they get better."

The subprime mortgage crisis has been so severe that some lenders—more than 30 in all—have been catapulted into bankruptcy. Yet, while the news about subprime mortgages has been troubling, apparently it wasn't bad enough to affect investors, who contributed to a record Dow Jones.

Meanwhile, the Fed is investigating the subprime situation and is trying to come up with recommendations to assist prospective homebuyers. These recommendations could include restricting loans that do not require proof of income as well as limiting financial penalties for homeowners who make their payments early.

The chairman of the Banking Committee, Sen. Chris Dodd (D-CT), indicated the Fed's actions were a step in the right direction.

"I trust and expect that it will result in significant action by the Fed to ensure that every American who seeks to buy a home will receive fair, reasonable and responsible treatment by his or her lender," Dodd stated.

Julie Ann Amos
July 25th 2007
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