Tuesday, March 13, 2007

 

Senate Weighs Aid to 2.2 Million Subprime Borrowers

Senate Weighs Aid to 2.2 Million Subprime Borrowers

By James Tyson

March 13 (Bloomberg) -- U.S. lawmakers will have to consider providing aid to about 2.2 million subprime mortgage borrowers who are at risk of defaulting and losing their homes, Senate Banking Committee Chairman Christopher Dodd said today.

``The impact of losing 2.2 million homes I suspect will be in a lot of areas of our cities and towns that are already pretty hard hit, so we clearly want to look at that and legislate,'' Dodd, a Democrat from Connecticut, told reporters in Washington after a speech to the National League of Cities.

Foreclosures involving homeowners who took out subprime loans from 1998 until 2006 could cost $164 billion, Dodd said, citing a December study by the Center for Responsible Lending in Durham, North Carolina. The government needs to provide at-risk homeowners ``forbearance or something like that to give them a chance to work through and get a new financial instrument here that they can manage financially better,'' Dodd said.

Delinquencies among subprime mortgage borrowers hit a four- year high in the fourth quarter, the Washington-based Mortgage Bankers Association said today. The trade group said 13.33 percent of subprime borrowers were behind on payments in the quarter, the highest rate since the third quarter of 2002.

More than two dozen mortgage lenders have gone bankrupt, closed operations or sought buyers since the beginning of last year as the effect of looser lending standards, slowing home- price gains, and less wage growth left banks holding bad loans.

Looking to Help

Congress ``may need to do something much more quickly to provide some protection or you could end up with a lot of poverty and blight,'' Dodd said. Federal aid of a few billion dollars ``may be a lot less costly'' than $164 billion in lost wealth, he said.

Mortgage defaults during the next two years may rise to $225 billion, with about $170 billion tied to subprime loans, according to a report yesterday by analyst at Lehman Brothers Holdings Inc. led by Srinivas Modukuri. Subprime borrowers are those with poor or limited credit backgrounds or high debt.

Dodd didn't specify the channel through which federal aid would be offered. ``I don't want to settle on the specifics of it, but clearly we are looking at what we can do to help out.''

Any formal legislation would have to be approved by Dodd's committee, then passed by both the full Senate and the House of Representatives before being signed into law by the president.

Costly Solution

Federal aid ``would come at a cost,'' said Douglas Duncan, chief economist at the Mortgage Bankers Association. ``It has to be paid for and the question is would the 34 percent of homeowners who have no mortgage be willing to pay taxes to support the bailout of people who traditionally have not managed credit well?''

Duncan expressed doubt that 2.2 million subprime mortgage borrowers will lose their homes, noting that the association lists only 300,000 such borrowers as being in foreclosure now.

Senator Richard Durbin, the No. 2 Senate Democratic leader, said he is open to the idea of helping subprime borrowers while noting that Democratic leaders haven't decided whether to do so.

``We have not discussed it, but that doesn't mean that we can't or shouldn't,'' Durbin said in an interview. ``Senator Dodd is in a key position on the Banking Committee and he's talked to us about the scope of this problem and what the reasonable response might be. I'm sensitive to it. There's nothing worse than a person losing their home.''

Durbin said that Democratic leaders will look to Dodd for recommendations as Dodd's committee examines the issue.

New Bill

Representative Barney Frank, a Democrat from Massachusetts and chairman of the House Financial Services Committee, reiterated today that he intends to introduce a bill to deter lenders from offering consumers mortgages they can't afford.

``We plan to legislate to restrict those kinds of mortgages going forward,'' Frank said after a hearing in Washington. He declined to elaborate on the timing or details of such legislation.

Dodd reaffirmed a plan to introduce a bill that would combat predatory lending. ``There is a difference between a subprime lender and a predator, and I don't want to lose the subprime lender,'' he said.

The Federal Reserve, Federal Deposit Insurance Corp and other U.S. regulators on March 2 directed banks to scrutinize underwriting standards, provide more information to customers about borrowing risks and ensure borrowers are able to repay loans.

``Finally the federal regulators are beginning to indicate that they want to start requiring similar standards to be used for prime and subprime lending,'' Dodd said, referring to the new guidelines.

``I am a strong advocate of subprime lending,'' Dodd said. ``I don't want that word to become a pejorative as junk bonds did.''

While not constituting a drag on the economy, defaults may increase to $300 billion if home prices fall and borrowers forgo refinancing because of stricter lending standards, Lehman said.

To contact the reporter on this story: James Tyson in Washington at jtyson@bloomberg.net

Last Updated: March 13, 2007 18:05 EDT

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