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Senate Panel Studies Subprime Loan Woes


And on Fridays we focus on your money. Today we report on mortgage lenders coming under scrutiny on Capitol Hill. As more homeowners face foreclosure, lawmakers are looking into the practices of subprime lenders who specialize in risky home loans to people with weak credit.

At a hearing yesterday, lawmakers leveled criticism at banking regulators as well. NPR's Chris Arnold reports.

CHRIS ARNOLD: Consumer advocates say irresponsible subprime lending has sparked a wave of foreclosures that will put more than a million Americans out of their homes. Most of the subprime loans or what they call exploding ARM loans, where even if overall interest rates in the market stay flat, the borrowers' payments still jump up, often 40 percent or higher after a couple of years.

Senate Banking Committee Chairman Christopher Dodd.

Senator CHRISTOPHER DODD (Democrat, Connecticut): The sort of frenzy that gripped the market over the past several years as many brokers and lenders started selling these complicated mortgages to low-income borrowers who they knew or should have known, in my view, would not be able to afford to repay these loans when the higher payments kicked in.

ARNOLD: Federal officials a few years ago were encouraging lenders to expand mortgages options to lower income people to enable homeownership. But it turns out the vast majority of these subprime loans or refinancings that often put people who already own a home into a riskier position.

Sen. DODD: These loans are made on the basis of the value of the property, not the ability of the borrower to repay. This is, in my view, the fundamental definition of predatory lending.

ARNOLD: Senators at the hearing wanted to know what regulators have been doing about all this. New Jersey Senator Robert Menendez.

Senator ROBERT MENENDEZ (Democrat, New Jersey): It just seems to me that you're all asleep at the switch.

ARNOLD: Menendez questioned Roger Cole, the director of the Federal Reserves Division of Banking Supervision.

Sen. MENENDEZ: The size of this problem leads me to question, regardless of everything that you're telling me, how it could it be this big and you have done your job?

Mr. ROGER COLE (Director, Federal Reserve's Division of Banking Supervision and Regulation): I will say that given what we know now, yes, we could have done more sooner.

ARNOLD: Regulators have sought to deflect some blame by saying that many subprime lenders are not mainstream banks and many are regulated at the state level. But Dodd said the Federal Reserve in particular had brought authority. He says the fed could've required all lenders to determine that borrowers could afford to repay these loans after they adjusted upwards. He pressed Cole on this point.

Sen. DODD: It seems common sense that you'd want to determine whether or not the borrower was in a position to financially pay at the fully indexed rate. This is not terribly complicated.

Mr. COLE: That's right.

Sen. DODD: Why didn't you do that?

ARNOLD: For their part, some regulators and company executives downplayed the damage. They said they did not see the subprime defaults creating serious problems for the economy. Sandy Samuels is an executive with Countrywide Financial Corp, one of the largest U.S. lenders. He said it's his company's policy that borrowers understand how much their payments could increase.

Mr. SANDY SAMUELS (Executive Managing Director, Countrywide Financial Corp): From our perspective, from Countrywide's perspective, we win when we have an educated borrower. And that's very important to us, because we want the borrower to know exactly what they're getting into so that we can make sure that they can stay in their home.

ARNOLD: That was hard to swallow for some struggling homeowners at the hearing. One said his mortgage broker lied to him and overstated his income on his loan application. Another homeowner, 77-year-old Jenny Halliburton(ph) from Philadelphia, said she had no idea that the payments on her Countrywide loan would end up being three quarters of her fixed income. She can't make the payments and doesn't want to lose her house.

Ms. JENNY HALLIBURTON (Homeowner): I feel like they took advantage of me because I'm 77. And they figured, oh well, she'll die soon and we'll take over. But there's so many elderly people like me are suffering and they're losing their homes.

ARNOLD: Lawmakers in the House and the Senate are pledging to find ways to assist struggling homeowners and to beef up regulations. But some in the industry warned that if they clamp down too hard, they'll cut lower-income people off from homeownership with good lenders.

Chris Arnold, NPR News.

MONTAGNE: If you're still unclear on just what a subprime loan is, check out our primer at npr.org. Transcript provided by NPR, Copyright NPR.

Chris Arnold
NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.