US plans curbs on subprime lenders

US plans curbs on subprime lenders
By Gillian Tett in London and Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: April 11 2007 22:01 | Last updated: April 11 2007 22:01



US politicians are drawing up a bill that could make it less attractive for Wall Street investment banks and other financiers to repackage risky mortgages into securities and then sell them to investors around the world.

Senior figures in Congress hope to force the financiers who buy mortgages and create mortgage-backed securities to share some of the liability – and thus financial cost – that might arise if mortgages were mis-sold to borrowers who proved unable to meet payments.

The proposal, which will be debated by the House financial services committee next week, could reduce the flow of finance from the capital markets into the mortgage sector. Politicians and consumer groups blame such flows for the lax lending practices that developed in the subprime market in recent years.

The idea under consideration is intended to assist distressed homeowners and prevent a recurrence of the subprime lending problems – initiatives that will also include tougher rules about how mortgages are sold to home buyers.

“We will regulate mortgage brokers,” Barney Frank, Democratic chairman of the financial services committee, told the Financial Times yesterday.

Warnings about a wave of foreclosures across America have prompted Democrats to turn their fire on Wall Street and federal regulators over their role in the high-risk lending boom.

Lawmakers said they would summon stakeholders to a crisis summit, while itigroup and Bank of America responded to the political pressure with an announcement yesterday by a non-profit advocacy group that the two largest US banks would make $1bn of loans available at favourable terms to borrowers on the verge of losing their homes.

Senator Charles Schumer of New York called for “hundreds of millions of dollars” to bail out distressed homeowners, though other leading Democrats reacted cooly to calls for an injection of federal money.

Any move to extend legal and financial liability for mortgage mis-selling is likely to face opposition from investment banks, who have recently enjoyed rich revenues from the fast-growing business of repackaging loans into new securities.

More than $2,000bn (£1,000bn) of mortgage-backed bonds were sold last year, of which about a quarter were securities linked to subprime mortgages, according to data from the Securities Industry and Financial Markets Association, an industry body.

SIFMA yesterday criticised the proposal, saying: Any legislative response should curtail abusive practices while not restricting the availability of credit or harming legitimate secondary market activity.”

But Mr Frank said he hoped the measures would be passed by the end of this year. “It is no part of my concern whether investment banks make money . . . the purpose of housing finance is to get people in houses, not to finance the US financial markets,” he said.

Mr Frank, a Democrat, said yesterday that he had still not agreed with Republican politicians on Committee the financial services committee on the precise details about how mis-selling liability might be assigned to those involved in securitisation.

Spencer Bachus, Mr Frank’s Republican counterpart, has backed an “assignee liability” system which would mean investment banks that repackage mortgages into bonds would be liable to pay compensation to borrowers if loans turned out to have been mis-sold. unless they can show they conducted extensive due diligence.

Such a move would make it less attractive to repackage these loans and to buy mortgage-backed securities.

Separately, Mr Frank said that his committee was also considering whether government-related entities should help restructure some private sector subprime mortgages and related securities.

“We are in the process of talking to [government-chartered mortgage groups] Freddie Mac and Fannie Mae about what type of instrument they may come up with,” he said. “They may be willing to take something of a haircut to stop the market from collapsing.”