Lawmakers must weigh the potential impact on housing and financial markets as Congress debates whether to impose new restrictions on mortgage lenders and provide additional help to troubled borrowers.
With more than 1.5 million homeowners facing interest-rate resets by the end of next year, some legislators are opposed to clamping down too hard on mortgage lenders, saying tightened underwriting standards have already created a credit crunch.
“A comprehensive consumer advocacy driven predatory lending bill is not the answer,” Rep. Tom Price, R-Ga., said in prepared remarks submitted for a Congressional hearing today. “It is tantamount to fighting the last war and will only make the markets more skittish as they have to react to new underwriting standards and liability issues making the situation worse, not better.”
But others said Congress should act to make sure mortgage lenders don’t take advantage of borrowers by offering them complex loans they don’t fully understand, and also provide more help to those who already have such loans.
Rep. Carolyn Maloney, D-N.Y., called for a uniform, national consumer protection standard to fight predatory lending, and said limits on the loan portfolios of mortgage repurchasers Fannie Mae and Freddie Mac should be raised.
“Fannie Mae and Freddie Mac are providing much needed liquidity in the prime market right now,” Maloney said in a prepared statement to the committee. “If there was ever a time when they should expand their activities it is now.”
The Bush administration has said that any decision to allow Fannie and Freddie to step up their mortgage repurchasing activities hinges on passage of a bill intended to strengthen oversight of the government-sponsored entities (GSEs), which are still working to put management and accounting scandals behind them.
The hearing, held by the House Committee on Financial Services, was an opportunity for top federal banking and finance officials to brief legislators on the potential impacts of disruptions in the mortgage lending and financial markets on the U.S. and world economies.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., said that an estimated $353 billion in subprime, adjustable-rate mortgages (ARMs) are scheduled to reset between now and the end of 2008. But while many homeowners will seek to refinance those loans to avoid higher monthly payments, the investment capital that once financed such loans has largely dried up.
“The uncertainty that now pervades this market — which is directly attributable to underwriting practices that are unsafe, unsound, predatory and or abusive — has seriously disrupted the functioning of the securitization market and the availability of mortgage credit,” Bair said in her prepared testimony.
Bair, who urged Congress in March to pass a national anti-predatory-lending standard that would prohibit misleading marketing and require lenders to analyze a borrower’s capacity to repay a loan, said the “originate and sell” model of selling mortgages to secondary market investors is under “intense pressure.” As a result, Bair said, banks and thrifts regulated by the FDIC may end up with more mortgage loans on their balance sheets.
That could pose a risk management challenge for many banks, she said. Those that do expand their mortgage lending portfolios will have to maintain sufficient capital to support that growth, Bair said.
Although the most recent financial results for the 8,615 banks and savings institutions insured by the FDIC showed “very strong performance” with nearly all institutions well capitalized, credit quality “is likely to get worse before it gets better,” Bair warned.
Second-quarter net charge-offs of $9.2 billion were 51 percent higher than the year before, with charge-offs for residential mortgage loans up 144 percent to $715 million. The 1.26 percent of all residential mortgage loans 90 days or more past due was the highest rate since 1994, Bair said.
“If the housing downturn continues, some institutions that are currently in good shape could face capital challenges resulting from losses in mortgage-related assets,” Bair said.
A Treasury Department official also warned of broader implications for global financial markets from the fallout in U.S mortgage lending.
Pension funds, mutual funds and hedge funds that have provided the capital markets with liquidity “can be highly leveraged and employ highly correlated strategies, potentially leading to more widespread market disruptions,” said Robert Steel, Undersecretary for Domestic Finance, in his prepared testimony.
Events in one country’s financial markets can have global implications, Steel said, and recent volatility in the credit and mortgage markets “is far from over.” Risk is being repriced, Steel said, and this repricing will lead to a reevaluation of assets, which will impact the balance sheets of financial market players.
“As investors review fundamental characteristics and confidence returns, liquidity will improve,” Steel said. But “policymakers must remain vigilant as further stress could create further challenges and continued volatility.”
Price argued that by the time Congress passes an anti-predatory-lending law, “this problem will already have changed, and we will be left with strict, national underwriting standards that will prohibit various loan products and banish a number of consumers to the rental market forever.”
Any legislation that creates additional liability for investors in the secondary market will harm borrowers who depend on investors to fund loans, the Georgia lawmaker said.
“The problem we’re seeing in the market now is because we don’t know which loans are in which securities,” Price said. “If trial lawyers are allowed to sue investors who buy mortgage-backed securities, investors will simply stop buying them. This would harm more people, not fewer.”