Fed To Curb Shady Home-Lending Practices

Source : The Straits Times, July 9, 2008

WASHINGTON - THE Federal Reserve will issue new rules next week aimed at protecting future homebuyers from dubious lending practices, the US central bank's most sweeping response to a housing crisis that has propelled foreclosures to record highs.

Fed Chairman Ben Bernanke spoke of the much-awaited rules in a broader speech on Tuesday about the challenges confronting policymakers in trying to stabilise a shaky US financial system. To that end, Mr Bernanke said the Fed may give squeezed Wall Street firms more time to tap the central bank's emergency loan program.

To prevent a repeat of the current mortgage mess, Mr Bernanke said the Fed will adopt rules cracking down on a range of shady lending practices that have burned many of the nation's riskiest 'subprime' borrowers - those with spotty credit or low incomes - who were hardest hit by the housing and credit debacles.

The plan, which will be voted on at a Fed board meeting on Monday, would apply to new loans made by thousands of lenders of all types, including banks and brokers.

Under the proposal unveiled last December, the rules would restrict lenders from penalising risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

'These new rules ... will address some of the problems that have surfaced in recent years in mortgage lending, especially high-cost mortgage lending,' Mr Bernanke said.

Consumer groups have complained that the proposed rules aren't strong enough, while mortgage lenders worry that they are too tough and could crimp customers' choices.

The Mortgage Bankers Association urged the Fed to 'take a balanced approach in devising final regulations so that the credit crisis is not worsened.'

Meanwhile, the Center for Responsible Lending, a group that promotes homeownership and works to curb predatory lending, warned the Fed that weak regulation and oversight has led to the 'worst credit crunch in generations.' The Fed - under former chairman Alan Greenspan - came under attack for not acting early on to crack down on dubious lending.

Some critics complained that Mr Greenspan, who ran the Fed for 18 1/2 years - failed to act as a forceful regulator especially during the 2001-2005 housing boom, when easy credit spurred lots of subprime home loans and many exotic types of mortgages.

Meanwhile, signs emerged Tuesday that the housing market's slump is likely to persist through the summer, and the real estate market may not recover for at least another year.

The National Association of Realtors' pending home sales index slipped by 4.7 per cent in May to the third-lowest reading on record.

The decline 'suggests we are not out of the woods by any means,' said the group's chief economist, Lawrence Yun. -- AP