US lawmakers Thursday called on the multitrillion-dollar mortgage industry to tighten up its lending practices and said they were mulling legislation to crack down on predatory lenders. A slump in the US housing market, following several years of booming growth, has seen home foreclosures jump in recent months, particularly in some midwestern states hit by job losses.
Democratic presidential contender Chris Dodd, the chairman of the Senate banking committee, said this emerging "crisis" could see over two million Americans lose their homes in the next few years.
Dodd spoke at a panel hearing which heard testimony from top executives of major mortgage lenders including Countrywide Financial Corp. and HSBC Finance Corp., part of the British global banking giant.
Analysts blame the rise in repossessions on a dramatic spike in interest rates that is being seen now on home loans known as ARMs (adjustable rate mortgages).
Millions of ARM loans were sold to home buyers with shaky finances during the boom of recent years.
"What we're looking at is a tsunami of foreclosures on the horizon," said Democratic Senator Robert Menendez.
Regulators from the Federal Reserve and other government agencies agreed there could be tough times ahead.
"We are very concerned about declining performance and rising foreclosures in the subprime market," underlined Emory Rushton, a top bank examiner at the Office of the Comptroller of the Currency.
Some industry groups estimate there are about 150 billion dollars' worth of mortgage loans that have become delinquent, primarily in the so-called "subprime" sector.
Subprime loans are usually granted to people with poor credit histories.
The cooldown in the housing market and rising defaults on mortgages have already triggered the collapse of some lenders.
A leading player in the subprime market, New Century Financial Corp., has seen its credit dry up. Last month, HSBC announced that it was setting aside over 10 billion dollars to guard against sour home loans.
"Many borrowers find themselves with loans they can't understand and loans they cannot afford," said Sandra Thompson, a senior official at the government's Federal Deposit Insurance Corp., which was established during the Great Depression to insure bank deposits.
Gloomy headlines about mounting foreclosures have sparked congressional concern, but industry executives said they were seeking to improve lending.
"We're taking strong steps to minimize the impact" of ARM rate hikes hurting borrowers, said Brendan McDonagh, the chief executive of HSBC Finance.
McDonagh said HSBC had stopped buying mortgages from other lenders in some instances, and was reviewing its loan offerings, but he urged lawmakers not to burden lenders with new regulation.
Countrywide executive managing director Sandor Samuels agreed Congress should guard against over-reacting.
But Irv Ackelsberg, a consumer attorney, slammed industry practices as "fraud-infested" and said consumers had been sold "exotic mortgages" with "teaser rates" which soon balloon into much higher mortgage repayments.
"I feel like they took advantage of me because I'm 77," said Jennie Haliburton, who said she signed up for an ARM loan with Countrywide initially based on a monthly repayment of 700 dollars.
The loan quickly rocketed to 1,100 dollars a month, Haliburton said, as higher interest rates kicked in.
Countrywide's Samuels promised lawmakers he would look into Haliburton's case, but the lenders also encouraged consumers to improve their understanding of mortgages.
"There's no silver bullet here, we need to improve financial literacy," said HSBC's McDonagh.
