A top executive at Countrywide Financial Corp. said Thursday that dropping home prices could produce record-high levels of foreclosures on loans made in 2006 to people with poor credit histories.
Sandy Samuels, executive managing director and chief legal officer of the Calabasas, Calif.-based mortgage lender, said in prepared remarks to the Senate Banking Committee that foreclosure rates on high-risk, or subprime, mortgages taken out last year may approach or exceed the level for similar loans taken out in 2000, when the foreclosure rate was nearly 10 percent.
However, Samuels urged Congress not to "lose sight of the reality that more than 90 percent of Countrywide's subprime borrowers will not lose their homes to foreclosure."
Samuels also warned lawmakers not to create overly tight restrictions on high-risk mortgages, saying that could lock out many would-be homebuyers.
Over the past 10 years, Countrywide's overall foreclosure rate for adjustable rate subprime loans was 3.4 percent, Samuels said. The so-called subprime mortgage market represents 7 percent of Countrywide's home loan volume, compared with 20 percent of the overall U.S. market, he said.
Samuels' testimony came as federal regulators said they lacked authority over expanding areas of the high-risk mortgage market, and as lawmakers pressed them on whether they were lax and helped fuel the spike in delinquent payments and foreclosures.
Anxiety that a blowup among subprime mortgage lenders could spill over into the broader economy has roiled the financial markets in recent weeks. New Century Financial Corp., the nation's second-largest subprime mortgage lender, has scrambled to stay afloat as banks cut off funding because of a failure to make payments.
Earlier this week, Fremont General Corp. said it would sell $4 billion in subprime residential real estate loans at a loss. And last Friday, Accredited Home Lenders Holding Co. announced plans to sell $2.7 billion of loans at a discount to satisfy margin calls from its lenders and stave off a liquidity crisis caused by rising defaults.
Sen. Christopher Dodd, D-Conn., the banking committee's chairman, laid out what he called a "chronology of regulatory neglect" as banks and other lenders loosened their standards for making riskier mortgage loans during the housing market boom in late 2003 and early 2004.
Dodd blamed the Federal Reserve and other regulators for setting off the crisis in subprime loans, which are higher-priced home loans for people with tarnished credit or low incomes who are considered at greater risk of default. Now, some 2.2 million homeowners could lose their homes in the next few years, said Dodd, a contender for the Democratic presidential nomination in 2008.
"Our nation's financial regulators were supposed to be the cops on the beat, protecting hardworking Americans from unscrupulous financial actors," Dodd said. "Yet they were spectators for far too long. "
Foreclosures have accelerated in recent months, especially among homeowners who took out subprime loans, raising worries that many people could lose their homes as mortgage delinquencies mount.
Shares of Countrywide fell 57 cents, or 1.5 percent, to close at $36.38 on the New York Stock Exchange, where those of Fremont General dropped 83 cents, or 8 percent, to close at $9.36.
Shares of Accredited Home Lenders rose 61 cents to close at $12.57 on the Nasdaq Stock Market.