Fed to curb shady home-lending practices
WASHINGTON -- The Federal Reserve will issue new rules next week aimed at protecting future homebuyers from dubious lending practices, its most sweeping response to a housing crisis that has propelled foreclosures to record highs.
Fed chairman Ben Bernanke spoke of the much-awaited rules in a broader speech Tuesday about the challenges confronting policymakers in trying to stabilize a shaky U.S. financial system. To that end, Bernanke said the Fed may give squeezed Wall Street firms more time to tap the central bank's emergency loan program.
To prevent a repeat of the current mortgage mess, Bernanke said the Fed will adopt rules cracking down on a range of shady lending practices that have burned many of the nation's riskiest "subprime" borrowers -- those with spotty credit or low incomes -- who were hardest hit by the housing and credit debacles.
The plan, which will be voted on at a Fed board meeting Monday, would apply to new loans made by thousands of lenders of all types, including banks and brokers.
Under the proposal unveiled last December, the rules would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.
"These new rules ... will address some of the problems that have surfaced in recent years in mortgage lending, especially high-cost mortgage lending," Bernanke said.
Consumer groups have complained that the proposed rules aren't strong enough, while mortgage lenders worry that they are too tough and could crimp customers' choices.
The Mortgage Bankers Association urged the Fed to "take a balanced approach in devising final regulations so that the credit crisis is not worsened."
Meanwhile, the Center for Responsible Lending, a group that promotes homeownership and works to curb predatory lending, warned the Fed that weak regulation and oversight has led to the "worst credit crunch in generations."
The Fed -- under former chairman Alan Greenspan -- came under attack for not acting early on to crack down on dubious lending. Some critics complained that Greenspan, who ran the Fed for 18 years -- failed to act as a forceful regulator especially during the 2001-2005 housing boom, when easy credit spurred lots of subprime home loans and many exotic types of mortgages.
Meanwhile, signs emerged Tuesday that the housing market's slump is likely to persist through the summer, and the real estate market may not recover for at least another year.
The National Association of Realtors' pending home sales index slipped by 4.7 percent in May to the third-lowest reading on record. The decline "suggests we are not out of the woods by any means," said the group's chief economist, Lawrence Yun.
In an extraordinary action aimed at averting a financial catastrophe, the Fed in March agreed to let investment houses go to the Fed -- on a temporary basis -- for a quick, overnight source of cash. Those loan privileges, which are supposed to last through mid-September, are similar to those permanently afforded to commercial banks for years.
"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end should the current unusual and exigent circumstances continue to prevail in dealer funding markets," Bernanke said in prepared remarks to a mortgage-lending forum in Arlington, Va.
The Fed's decision to act -- temporarily at least -- as a lender of last resort for Wall Street firms was made after a run on Bear Stearns pushed the investment bank to the brink of bankruptcy and raised fears that others might be in jeopardy. It was the broadest use of the Fed's lending powers since the 1930s.
Bear Stearns was eventually taken over by JPMorgan Chase & Co., with the Fed providing $28.82 billion in financial backing.
Those controversial decisions have drawn criticism from Democrats in Congress and elsewhere that the Fed is bailing out Wall Street and putting billions of taxpayer dollars at risk.
Bernanke, in appearances on Capitol Hill has said he doesn't believe taxpayers will suffer any losses.
In his speech Tuesday, the Fed chief defended those actions anew. If the Fed didn't intervene, he said, problems in financial markets would have snowballed, imperiling the country.
"Allowing Bear Stearns to fail so abruptly at a time when the financial markets were already under considerable stress would likely have had extremely adverse implications for the financial system and for the broader economy," Bernanke said to the mortgage forum, organized by the Federal Deposit Insurance Corp.
Dodd, meanwhile, praised the Fed's actions in a statement Tuesday, saying, "I am pleased that the Federal Reserve is now taking steps to issue new rules for mortgage lending and to improve oversight of our financial system. As documented by the Senate Banking Committee, it was the lack of regulatory will, not lack of regulatory authority, that contributed to the current credit crisis."
The Fed's consideration of giving Wall Street firms more time to tap the Fed's emergency loan program is part of an ongoing effort by the central bank to bring back stability to fragile financial markets and help to bolster shaky confidence on the part of investors.
Policymakers -- in the White House, in Congress and other federal agencies -- will need to work together to come up with ways to make the U.S. financial system more resilient and stable and to prevent a repeat of the types of problems that brought about the end of Bear Stearns, an 85-year-old institution, Bernanke said.
Although those efforts are already under way and will be the focus of a House Financial Services Committee hearing Thursday, it will fall to the next president and next Congress to settle them. Both Bernanke and Treasury Secretary Henry Paulson are scheduled to testify at Thursday's hearing.
The Bush administration has proposed revamping the nation's financial regulatory structure. That plan would make the Fed an ubercop in charge of financial market stability. But the Fed would lose daily supervision of big banks. Bernanke said the Fed must maintain this power if it is to be an effective overseer of financial stability.
The Fed, which regulates banks, and the Securities and Exchange Commission, which oversees investment firms, announced an information-sharing agreement on Monday aimed at better detecting potential risks to the financial system.
Over the longer term, though, Congress may need to adopt legislation to bolster supervision of investment banks and other large securities dealers, Bernanke said.
Bernanke recommended that Congress give a regulator the authority to set standards for capital, liquidity holdings and risk management practices for the holding companies of the major investment banks. Currently, the SEC's oversight of these holding companies is based on a voluntary agreement between the SEC and those firms.