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Fed May Move to Fix Ailing Home Mortgage Market

The Federal Reserve is set to hold hearings Thursday on how to fix problems in the mortgage market that have resulted in an increasing number of homeowners with shaky credit falling behind in their mortgage payments.

Fed Chairman Ben Bernanke says the problem is likely to get worse as adjustable interest rates rise.

Home loans made to people with poor credit nearly tripled in recent years as the housing market boomed. Now, many of those borrowers are finding themselves in trouble.


Bernanke said last week that about one in eight so-called "subprime" borrowers with adjustable-rate mortgages have missed three straight payments or more, putting them at risk of losing their homes.

Sheri Stinson of Minneapolis cleans hotel rooms for a living, and she said it is hard to keep up with her mortgage, since her house payments jumped by $500 a month.

"When you only gross $2,000 a month, it's pretty hard when your house payment alone is $1,800. Plus, I have two kids, a car payment, utility bills and things like that," said Stinson.

The Federal Reserve will consider ways to limit prepayment penalties that sometimes trap borrowers in unfavorable loans, and also look at loans made without verifying a borrower's income.

Consumer advocate Mike Calhoun, of the Center for Responsible Lending, said such loans often carry low introductory payments but quickly outstrip borrowers' ability to pay.


"We see over and over again when documentation from the lender is collected that the broker has represented that the borrower's income is far greater than it actually was. And as a result, the borrower is in a loan with payments that they ultimately can't afford," said Calhoun.

Several lenders will also testify, including representatives from Wells Fargo, JP Morgan Chase, and Option One Mortgage Corp. Spokesmen for the lenders declined to comment before the hearing. The Fed will also hear from state regulators about steps that have been taken in Massachusetts, North Carolina, Iowa and Minnesota.

Minnesota's legislature passed a law this spring designed to limit "predatory" home loans. It includes some of the same restrictions the Fed is considering. It requires mortgage brokers to act in the best interest of their clients.

"I think a lot of borrowers assume that the broker is on their side. And that's certainly the way the brokers historically have presented themselves, while not always acting in that way," said Jim Davnie, a Minnesota state representative.

Calhoun, of the Center for Responsible Lending, said the Federal Reserve is the only federal agency with the power to regulate the entire mortgage market. So, a lot of people are watching how the Fed decides to use that authority.

"A tremendous amount hinges on whether the Federal Reserve takes action that is effective in stopping the rampant abuses in today's mortgage market," said Calhoun.

Researcher Ren Essene, of Harvard University's Joint Center for Housing Studies, said it is important to preserve some kind of home loans for borrowers with shaky credit.

"We need to be careful that we regulate appropriately but that we don't turn off the spigot of credit. We want to stop those practices that are predatory or those practices that are causing these huge losses. Clearly, we haven't struck that balance yet," said Essene.

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