Treasury says subprime problem is manageable

Section:

Like, what else are they going to say? "It's a disaster and we're going to have to reduce interest rates fast, devalue the dollar by 40 percent, and impose currency and credit controls"?

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By Marcy Gordon
Associated Press
via Yahoo News
Monday, March 12, 2007

http://news.yahoo.com/s/ap/20070313/ap_on_bi_ge/subprime_lending;_ylt=Ar...

The government is monitoring the distress in the subprime mortgage industry and believes the current situation is manageable, a Treasury Department official said Monday.

The comments by Robert Steel, the Treasury undersecretary for domestic finance, came as concern mounted on Wall Street and elsewhere that a blowup of companies that make higher-risk home loans to consumers with poor credit or low incomes could spill over into other industries.

"We monitor the markets all the time, and are hopefully pretty aware of market conditions," Steel told reporters in response to a question. "It seems to us that the situation is a manageable one, that we're watching."

Federal bank regulators, concerned about a spike in delinquencies and defaults on subprime home mortgages, earlier this month called on lenders to exercise caution in making the loans and to strictly evaluate borrowers' ability to repay them. The regulators said the guidelines, if formally adopted by the agencies and followed by lending institutions, could result in fewer borrowers qualifying for subprime loans.

Stocks rose on Wall Street on Monday as investors looked past widening cracks in the subprime lending sector. A warning from New Century Financial Corp. about its financial woes initially overshadowed positive merger news in the trading session.

The prospect of bankruptcy loomed over New Century, the nation's second-largest subprime mortgage maker, which scrambled to stay afloat after all its bank lenders cut off funding or informed the company of their intent to do so because of its failure to make payments. Irvine, Calif.-based New Century, which already has stopped accepting all new loan applications, said there is no guarantee it will receive additional financing.

Like other subprime lenders, New Century uses short-term borrowings to finance mortgage loans it makes and buys. Also like others, the company has been having difficulty obtaining the short-term lending needed to finance the mortgages.

The subprime sector has seen a sharp decline in banks' demand for potentially troublesome loans as the housing market has slowed since late 2005, grounding the high-flying real estate boom of earlier in the decade. As long as home prices were going up, borrowers who got into trouble could just refinance or sell their homes, sparing banks from being stuck with sour loans.

The fallout from the housing downturn has spurred several subprime lenders, including ResMae Mortgage Corp., Ownit Mortgage Solutions and Mortgage Lenders Network Inc., to file bankruptcy in recent months.

On Capitol Hill some mortgage industry executives told lawmakers that the subprime turmoil is a cause for concern but does not warrant government intervention, because the financial market can weed out the problem companies.

"There's absolutely no question that there were lenders with this product that got aggressive," John Robbins, chairman of the Mortgage Bankers Association, testified at a hearing of a House Financial Services panel. Those lenders are now being punished by the market as investors abandon them, he said.

Another witness, Karen Shaw Petrou, managing partner of Federal Financial Analytics, noted that subprime mortgages account for an estimated $1 trillion of the $8 trillion U.S. home-mortgage market.

"It is a very distressing picture at this point," she said. "People forgot that subprime means higher risk, higher risk means more losses."

A liberal think tank said Monday that the federal government should take new steps to protect low-income homeowners at risk of foreclosure.

The Center for American Progress said the government should consider grants to expand mortgage aid and foreclosure prevention programs for families falling behind on their monthly payments. As many as 2.2 million families around the country could lose their homes to foreclosure in the coming years, according to a 2006 report by the Durham, N.C.-based Center for Responsible Lending.

"Congress can't wait for that many families to foreclose," said Almas Sayeed, who wrote the report for the Center for American Progress. "The economic impacts for communities and for the country could be devastating."

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