Subprime lendings's political windfall

When Sen. Chris Dodd invited executives from five top subprime lenders to testify before the Senate Banking Committee this week, Inman Blog wondered what kind of turnout he'd get. 

Well, almost everybody Dodd invited came -- HSBC, Countrywide, WMC Mortgage, First Franklin. The lone no-show was New Century.

New Century's lawyers might have discouraged the company's executives from making the trip from sunny California, seeing as how the local U.S. Attorney has launched a criminal investigation of trading in the lender's securities and accounting errors in allowances for loan repurchases. There's also a passel of civil suits by shareholders alleging they bought New Century stock at artificially inflated prices.

Dodd called the company's absence "regrettable. New Century played a leading role in pushing unaffordable subprime loans and they should be here to explain their actions.”

The senator from Connecticut, who's considered a long shot for the Democratic Party presidential nomination, said the purpose of the hearing was "not to point fingers but to find solutions."

Dodd then proceeded to point fingers -- at the Federal Reserve and federal regulators, among others -- laying out a "chronology of neglect" that led to the current crisis.

"Our nation’s financial regulators were supposed to be the cops on the beat,  protecting hard-working Americans from unscrupulous financial actors," Dodd said. "Yet, they were spectators for far too long."

So what's the fix? Dodd has already pressed regulators to extend the tighter guidelines issued last fall for "exotic" mortgages (include beefed up underwriting standards) to hybrid ARMs. He said the Fed should use the authority it already has under the Home Ownership and Equity Protection Act of 1994 to stop abusive lending practices. And Dodd said he'll work on legislation strengthening consumer protections.

Democratic presidential contenders Hillary Clinton and Barack Obama are also positioning themselves as friends of the subprime mortgage borrower,  and no doubt politicians on both sides of the aisle will take up the cause.

But many in the lending industry (and more than a few economists) say the greatest danger going forward is that regulators will go overboard in reining them in. If easy credit exaggerated the housing boom, they say, tight credit will magnify the bust. With investors now demanding better returns for risky loans, lending standards have already tightened up enough and there's no need for lawmakers to pile on.
--Matt Carter, Inman News

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