Fed Plans To Curb Mortgage Excesses
Saturday, December 15, 2007
The Federal Reserve is set to change home-loan lending practices that are blamed for pushing the nation into a housing downturn, but the effort is expected to fall short of far more stringent efforts by Congress.
The new Fed rules, which may be announced as soon as Tuesday, aim to curb predatory lending and the overuse of exotic home loans without hurting the financial system that backs mortgage lending, according to lawmakers and sources close to the Fed.
But members of Congress are calling for a far-reaching reshaping of the mortgage industry. Several bills introduced by Democrats would radically alter compensation for tens of thousands of home-loan brokers. Homeowners found to be victims of predatory lending could be empowered to sue their lenders. The measures could also lead to the elimination of entire categories of mortgages, such as adjustable-rate subprime loans, industry groups contend.
Like the measures in Congress, the Fed rules would require lenders to clearly disclose mortgage information to consumers and to raise standards for approving mortgage applications.
Fed officials, however, have indicated they may take a softer stance on some practices that have become widely disparaged in the mortgage crisis. For example, subprime mortgage holders are often forced to pay large penalties if they pay off their mortgages ahead of schedule. Many lawmakers want to eliminate those penalties. But some at the Fed have suggested in public remarks that the penalties can protect lenders that offer low rates to people with questionable credit.
The more moderate approach by the Fed is raising questions not only among lawmakers, but also consumer advocacy groups who say the Fed tends to put the interests of the banking system before those of homeowners. Some legislators say they are willing to pass laws that would trump the Fed's new rules if they are too weak.
"If I was going to list the top 87 entities in Washington in order of the history of their efforts on consumer protection, the Fed would not make it," Rep. Barney Frank (D-Mass.) said. "If you look at the Fed governors, their focus has been on the safety and soundness of the banking system, not consumers."
Other lawmakers say the Fed moved too slowly to rein in lax lending standards even though it knew about widespread problems as far back as 2003.
Before Ben S. Bernanke became chairman nearly two years ago, "the Fed racked up a long record of neglect in regards to predatory lending," said Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), who introduced his version of mortgage-lending reform this week. "The Fed was aware of the dangerous, approaching subprime storm for years and yet did not act. . . . It was asleep at the switch. Millions of American families are enduring real hardship because of its failure."
Susan Stawick, a spokeswoman for Fed, said the agency had no comment. She pointed to testimony given in July by Bernanke to the House Financial Services Committee. "We were very active early on in providing guidance on best practices, on doing disclosure work, on doing fair lending reviews and so on," he said then.
Other Fed officials have acknowledged to Congress that they moved too slowly to address deteriorating lending standards. "Given what we known now, yes, we could have done more sooner," Roger T. Cole, the Fed's director of banking supervision and regulation, told the Senate Banking Committee in March.
The Fed's role in the mortgage mess highlights the complexity of lending reform. Few industries are as arcane and have so many participants, including ordinary home buyers, brokers, real estate agents, lenders, big Wall Street banks and investors who buy the mortgages and trade them as bonds worldwide. The housing crisis has put those parties in conflict with one another.
For example, lawmakers proposed legislation that would change how home buyers are approved for adjustable-rate mortgages, which have low introductory interest rates that jump after several years. Democrats want to require lenders to offer such mortgages to home buyers only if they can afford monthly payments at the higher rate.
But industry associations say that proposal would leave lenders with little reason to offer such mortgages. Ultimately, consumers would have fewer choices, they say.
"If you are too severe or too draconian, you are going to eliminate value in the marketplace," said Steve O'Connor, senior vice president of government affairs for the Mortgage Bankers Association.
And yet, without stronger consumer protections, the same lax lending practices that precipitated the mortgage crisis could continue, consumer advocates say.
Lawmakers also want to change how brokers are compensated. Brokers collect higher fees for selling high-interest and subprime mortgages. Consumer advocates say those payments motivated brokers to push risky loans on people who qualified for traditional fixed-rate mortgages.
If those fees are eliminated by Congress, it would radically change the business and tens of thousands of brokers could quit, said Roy DeLoach, executive vice president of the National Association of Mortgage Brokers.
"If we are taken out . . . it will allow fewer competitors in the mortgage business and that translates into higher rates for consumers," DeLoach said. About half of all mortgages are sold through a broker, Taylor said.
Fed officials must balance these competing interests as it makes new rules. The Fed under Alan Greenspan was criticized for being weak on consumer protection.
Democrats say that is changing under Bernanke. He consults almost daily with Federal Reserve Board Governor Randall S. Kroszner, who was put in charge of the Fed's consumer and community affairs committee in March and is spearheading the new mortgage-lending rules.
John Taylor, president and chief executive of the National Community Reinvestment Coalition, a consumer advocacy group, said he has noticed the difference Bernanke has made.
"When the Fed refers to their clients, they are not talking about consumers, they are talking about banks," he said. "There needs to be a cultural change at the highest levels . . . and I'm hopeful that Bernanke is going to bring that."