Senators examine home foreclosure surge

By MARCY GORDON, AP Business Writer Wed Feb 7, 4:19 PM ET

With home foreclosures surging, senators on Wednesday examined lending practices that especially hurt minorities and seniors and can heighten the risk of default.

Sen. Christopher Dodd (news, bio, voting record), chairman of the Banking Committee, said the mortgage industry has to take greater responsibility and federal regulators may have to intervene.

"We are seeing increasing evidence that this important source of wealth for so many American families is under a grave threat from predatory, abusive and irresponsible lending practices undertaken by too many subprime lenders," Dodd, D-Conn., said at a hearing.

"The industry has got to step up," he said.

In the sizzling housing boom that waned in the latter half of 2005, many people took out subprime mortgages — higher-interest loans for people with blemished credit records who are considered higher risks — with adjustable interest rates. When interest rates rise, as happened in the spring of 2005, it can raise monthly payments for people with adjustable-rate mortgages, potentially creating a strain if they stretched to buy a home and don't have a financial cushion in their savings.

Home mortgage delinquency and foreclosure rates have been rising, and the impact could be greatest on low-income families that took out higher-interest loans for risky borrowers.

The foreclosure wave also is being fueled by the popularity in recent years of riskier interest-only, "no-document" and other nontraditional mortgages.

The Rev. Jesse Jackson, testifying at the hearing, said Congress must pass "strong laws to protect the vulnerable" by curbing abusive home-loan practices.

Predatory lending occurs, for example, when lenders pressure home borrowers into high-interest loans that they may not be able to repay. Blacks, Hispanics, seniors and immigrants often are targeted in abusive home lending, experts say.

"Lenders and brokers have financial incentives to place borrowers in more expensive loans," Jackson said. "It puts responsible lenders at a competitive disadvantage with the irresponsible lenders, allowing unscrupulous predatory lenders to control the market."

Harry Dinham, president of the National Association of Mortgage Brokers, argued against new legislation or rules governing the mortgage brokerage industry, saying it is sufficiently regulated at the federal and state levels.

"No law or regulation should ever require any mortgage originator to supplant the consumer's ability to decide for him or herself what is or is not an appropriate loan product," he testified. "As the decision-maker, the role of the consumer is to acquire the financial acumen necessary and take advantage of the competitive marketplace, shop, compare, ask questions and expect answers."

At the same time, Dinham acknowledged that requirements under current law are "woefully inadequate" for what must be disclosed to consumers concerning their home loans.

Dodd said he planned to call on federal agencies that oversee home lending, such as the Federal Reserve, to discuss whether they should impose restrictions on mortgage industry practices.

Dodd, one of several Democrats in the Senate who are seeking the party's presidential nomination in 2008, has put consumer issues on the committee's agenda for this year. He has said that he will not impose a blanket ban on accepting political contributions from industries that the panel oversees.