N.Y. Plans Probe of High-Risk Lenders

New York Attorney General Andrew Cuomo's office has launched an investigation into subprime lending. (By Mike Groll -- Associated Press)

New York Attorney General Andrew Cuomo said his office is investigating subprime mortgage lenders, whose borrowers have fallen behind on their payments at the highest rate in four years.

Cuomo, a Democrat, disclosed his investigation in response to a question at a news conference in Manhattan yesterday, but he declined to provide details on the inquiry. Subprime, or risky, mortgages are loans made to home buyers with a poor or limited credit history.

His statement follows accusations by regulators in five states that New Century Financial of Irvine, Calif., the second-biggest U.S. subprime mortgage lender, broke laws by not producing money it had promised to home buyers.

Shares of mortgage lenders have dropped, and former Federal Reserve chairman Alan Greenspan said yesterday that he worried about the economic repercussions of subprime-mortgage defaults, especially if home prices decline.

"If prices go down, we will have problems -- problems in the sense of spillover to other areas," Greenspan said in remarks to a Futures Industry Association meeting in Boca Raton, Fla. Although he said he has not seen such spreading yet, he said he expects to.

Turmoil in the subprime mortgage market is grabbing attention in Congress. Sen. Hillary Rodham Clinton (D-N.Y.), echoing Greenspan's concerns, said the federal government should take steps to reduce interest rates and fees for borrowers who are losing their homes at record rates as the subprime mortgage market collapses.

Clinton proposed eliminating pre-payment penalties that she said are designed to trap borrowers by imposing high fees for paying off loans ahead of time. Such penalties apply to 70 percent of subprime loans and less than 5 percent of prime loans, Clinton said yesterday at a National Community Reinvestment Coalition conference in Washington. Clinton is a Democratic presidential candidate.

Lenders should give borrowers who fall behind on their mortgages a "foreclosure timeout" to allow them time develop a payment plan, Clinton said.

Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee and a Democratic presidential candidate, said he would hold a hearing on the issues on Thursday.

Although Cuomo would not discuss the nature of his investigation, unlike most attorneys general, the New York office has criminal prosecution powers. Regulators in Massachusetts, New Hampshire, New Jersey and New York accused New Century of "failure to fund mortgage loans," the company said Wednesday in a filing. Separately, Ohio's attorney general said a judge halted New Century's operations in that state.

The company, which made nearly $60 billion in mortgage loans in 2006, said last week that it could not fund any new home loans because bank companies, including Morgan Stanley of New York, cut off credit. New Century has said it may not be able to stay in business without new sources of cash. New Century said it was talking with state regulators regarding its "funding crisis."

The New York attorney general's office has previously investigated the subprime lending market. In December, Eliot L. Spitzer, who was attorney general at the time, announced a settlement with Countrywide Financial, the biggest U.S. mortgage lender, to compensate minority borrowers in New York who were charged more than whites for loans.

In January 2006, Spitzer and attorneys general in 48 states signed on to a $325 million settlement agreement with Ameriquest Mortgage, the national's largest subprime lender, in connection with its sales, appraisal and closing practices.

Alison Vekshin contributed to this report.