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Real Estate
WASHINGTON – July 9, 2008 – The Federal
Reserve will issue new rules next week aimed at protecting future
homebuyers from dubious lending practices, its 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 Tuesday about the challenges
confronting policymakers in trying to stabilize a shaky U.S.
financial system. To that end, 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, Bernanke said the Fed will adopt rules cracking down on a
range of shady lending practices that has 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 penalizing 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,” 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.
In an extraordinary action aimed at
averting a financial catastrophe, the Fed in March agreed to let
investment houses go to the Fed – on a temporary basis – for a
quick, overnight source of cash. Those loan privileges, which are
supposed to last through mid-September, are similar to those
permanently afforded to commercial banks for years.
“We are currently monitoring developments
in financial markets closely and considering several options,
including extending the duration of our facilities for primary
dealers beyond year-end should the current unusual and exigent
circumstances continue to prevail in dealer funding markets,”
Bernanke said in prepared remarks to a mortgage-lending forum in
Arlington, Va.
The Fed’s decision to act – temporarily at
least – as a lender of last resort for Wall Street firms was made
after a run on Bear Stearns pushed the investment bank to the brink
of bankruptcy and raised fears that others might be in jeopardy. It
was the broadest use of the Fed’s lending powers since the 1930s.
Bear Stearns was eventually taken over by
JPMorgan Chase & Co., with the Fed providing $28.82 billion in
financial backing.
Those controversial decisions have drawn
criticism from Democrats in Congress and elsewhere that the Fed is
bailing out Wall Street and putting billions of taxpayer dollars at
risk.
Bernanke, in appearances on Capitol Hill,
has said he doesn’t believe taxpayers will suffer any losses.
In his speech Tuesday, the Fed chief
defended those actions anew. If the Fed didn’t intervene, he said,
problems in financial markets would have snowballed, imperiling the
country.
“Allowing Bear Stearns to fail so abruptly
at a time when the financial markets were already under considerable
stress would likely have had extremely adverse implications for the
financial system and for the broader economy,” Bernanke said to the
mortgage forum, organized by the Federal Deposit Insurance Corp.
The Fed’s consideration of giving Wall
Street firms more time to tap the Fed’s emergency loan program is
part of an ongoing effort by the central bank to bring back
stability to fragile financial markets and help to bolster shaky
confidence on the part of investors.
Policymakers – in the White House, in
Congress and other federal agencies – will need to work together to
come up with ways to make the U.S. financial system more resilient
and stable and to prevent a repeat of the types of problems that
brought about the end of Bear Stearns, an 85-year-old institution,
Bernanke said.
Although those efforts are already under
way and will be the focus of a House Financial Services Committee
hearing Thursday, it will fall to the next president and next
Congress to settle them. Both Bernanke and Treasury Secretary Henry
Paulson are scheduled to testify at Thursday’s hearing.
The Bush administration has proposed
revamping the nation’s financial regulatory structure. That plan
would make the Fed an ubercop in charge of financial market
stability. But the Fed would lose daily supervision of big banks.
Bernanke said the Fed must maintain this power if it is to be an
effective overseer of financial stability.
The Fed, which regulates banks, and the
Securities and Exchange Commission, which oversees investment firms,
announced an information-sharing agreement on Monday aimed at better
detecting potential risks to the financial system.
Over the longer term, though, Congress may
need to adopt legislation to bolster supervision of investment banks
and other large securities dealers, Bernanke said.
Bernanke recommended that Congress give a
regulator the authority to set standards for capital, liquidity
holdings and risk management practices for the holding companies of
the major investment banks. Currently, the SEC’s oversight of these
holding companies is based on a voluntary agreement between the SEC
and those firms.
The
Associated Press, Jeannine Aversa (AP Economics Writer).
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