Tuesday, March 13, 2007
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.
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.
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 atLast Updated: March 13, 2007 18:05 EDT
Upping the war with the New York Stock Exchange for stock listings, the Nasdaq on Monday said it will start accepting companies with one, two and three letters in their stock symbols.
This removes one of the clearest demarcation lines between Nasdaq and NYSE: Until now, a Nasdaq stock had at least four letters in its symbol such as MSFT for Microsoft or GOOG for Google . While the change may seem mundane, it's significant because it:
• Makes switching exchanges easier. Allowing symbols of different lengths removes a last psychological barrier companies have when considering moving their listing to the Nasdaq from another exchange, says Bill O'Brien at Nasdaq. So companies like IBM , GM or GE, for instance, could now switch their listing to the Nasdaq without losing a symbol that has long been their badge of honor on Wall Street. Delta Financial became the first company to take up the Nasdaq's offer — though it won't be the NYSE's loss. It will carry the symbol DFS when it moves from the American Stock Exchange to the Nasdaq on March 22.
"Companies get attached to their symbol: It's part of the corporate and brand identity," O'Brien says.
Letting companies keep their symbols could be a minor selling point for listing a stock, says Larry Harris, finance professor at the University of Southern California. "Some firms care about their ticker symbol," he says. By limiting to four-letter symbols, the 423 non-Nasdaq stocks in the current Standard & Poor's 500 would have had to change symbols to list on Nasdaq.
• Helps shed lingering stigmas of Nasdaq's early days as a haven for over-the-counter shares. Last year, Nasdaq separated from its parent, the NASD, and became a full-blown, self-regulated exchange on par with the NYSE. Allowing short symbols is the next PR move. "It's generally held a short ticker symbol is a high-status item," Harris says. "It's another way the Nasdaq can show the world it's a real exchange."
• Introduces some confusion. Investors could recognize Nasdaq stocks instantly by their four-letter symbols. That goes away now.
Some question if the move alone will help Nasdaq win listings. Hans Stoll, professor of finance at Vanderbilt, says previous efforts have had mixed success. Only 11 companies have made the NYSE-to-Nasdaq switch since 2004. The NYSE will stick with one-, two- and three-letter symbols, spokesman Rich Adamonis says.
With the symbol issue eliminated, though, the NYSE and Nasdaq will compete on things like quality of trading and fees, he says. "It's nice to retain the symbol," Stoll says. "But it's not a fundamental factor in the desirability of an exchange."