By Eoin Callan, Edward Luce and Krishna Guha in Washington
Published: March 22 2007 18:50 | Last updated: March 23 2007 00:33
The Federal Reserve helped create a “perfect storm” in the US subprime mortgage market that could expose up to 2.2m more Americans to the threat of home foreclosure, Chris Dodd, chairman of the Senate Banking committee, said on Thursday.
Mr Dodd, who is also a Democratic Party candidate for the 2008 presidential nomination, alleged the Fed had failed in its oversight role when the growth in high-risk “adjustable rate mortgages (ARM)” to risky borrowers was exploding.
While questioning leading mortgage lenders and federal banking regulators, Mr Dodd also promised legislation to crack down on predatory lending in the US mortgage market, where a rising level of repayment delinquency has caused global market jitters during the past month.
Mr Dodd said that US regulators had relaxed guidelines on mortgage lending at precisely the point in 2004 and 2005 when the riskiest ARM loans – which impose initially light monthly payments that escalate quickly at a later date – were increasing most rapidly. That also coincided with the start of the Fed’s consecutive 17-stage rise in rates.
“Despite those warning signals the leadership of the Federal Reserve seemed to encourage the development and use of ARMs that, today, are defaulting and going into foreclosure at record rates,” he said.
Mr Dodd, who was supported by Richard Shelby, the senior Republican on the committee, also expressed frustration at the fact the Fed had so far failed to issue promised guidance to tighten controls on the $1,200bn subprime mortgage market.
An estimated 1m subprime borrowers will have their rates adjusted sharply upwards this year and another 800,000 next. Roger Cole, a senior Fed official, said the guidance would come out by May at the earliest. But he conceded that the Fed could have done more.
Thursday’s hearing could mark the start of a backlash against leading subprime mortgage lenders. Senior executives from four of the leading lenders – HSBC, Countrywide, WMC Mortgage, First Franklin – testified. Of those invited, only New Century, the largest subprime lender, declined to send a witness.
Mr Dodd said the lenders had engaged in “unconscionable and deceptive” practices. But he also admitted that it would be hard to pass a stricter law.
The Center for Responsive Politics, a watchdog, said New Century more than doubled its Washington lobbying efforts between 2004 and 2005 and contributed $342,000 in campaign funds to candidates in last year’s mid-term congressional elections.
Mr Dodd said lenders had engaged in “unconscionable and deceptive” practices.