Fed rapped over subprime loans

Fed rapped over subprime loans
By Eoin Callan, Edward Luce and Krishna Guha in Washington
Copyright The Financial Times Limited 2007
Published: March 23 2007 02:00 | Last updated: March 23 2007 02:00



The Federal Reserve and its former chairman Alan Greenspan helped to create the "perfect storm" in the US subprime mortgage market that could expose up to 2.2m Americans to the threat of home foreclosure, Chris Dodd, chairman of the Senate Banking committee, said yesterday.

Mr Dodd, a Democratic party candidate for the 2008 presidential nomination, said the subprime mortgage industry was guilty of some "abhorrent" lending practices. But he said the lion's share of the blame for the crisis lay with national regulators, "in particular the Fed". He said the Fed and other regulators failed to exercise proper oversight when the market for high-risk mortgage products took off.

"That is pretty negligent in my view," he told reporters, adding: "The Fed has got a responsibility as a good cop to be on the beat."

Mr Dodd said he would call a summit of industry executives, investors and regulators to try to agree a plan that would allow people sold the wrong kind of mortgage to keep their homes while negotiating with creditors to deal with excess debt.

He said he would be "very resistant" to the idea of raising new money from taxpayers to fund a bail-out. But he held open the possibility of changing the rules to allow existing community development funds, block grants and housing grants to be used to support people caught up in the subprime crisis. His comments followed a day of hearings in which regulators and industry officials were questioned harshly by members of his committee.

Senior executives from four of the leading lenders - HSBC, Countrywide, WMC Mortgage, First Franklin - testified. Of those invited, only New Century, the largest subprime lender, failed to send a witness. While regulators suffered the brunt of the criticism yesterday, the hearings highlight the risk of a political backlash against the industry. Under interrogation, Roger Cole, a senior Fed staff official, conceded that the Fed could have done more to prevent the sale of inappropriate loans. "Given what we know now - yes, we could have done more sooner."

However, Mr Cole did not admit that the Fed had made mistakes based on the information available to it at the time.

Mr Dodd played down the prospects for legislation. Instead, he urged regulators to use existing powers to clamp down on irresponsible practices. Mr Dodd said regulators should require that all lenders offering adjustable rate mortgages (ARMs) with low initial interest rates check that borrowers could afford the increased monthly payment when the interest rate went up.

Several industry executives signalled that they would support such a move but Sandor Samuels, managing director of Countrywide, the largest mortgage US provider, warned against an "overreaction" that would deny people with temporarily low income or bad credit scores access to home loans.