WASHINGTON -- With millions of Americans facing the prospect of sharply rising mortgage payments, borrowers and their hometowns could face an upsurge in home foreclosures, a top Federal Reserve official told Congress yesterday.
"The impact of mortgage delinquency and foreclosure on consumers and communities is one of great concern," said Sandra Braunstein, director of the Fed's Division of Consumer and Community Affairs. "We have much work ahead of us, as there is no one sure and easy fix."
But Sheila Bair, chairman of the Federal Deposit Insurance Corp., urged lawmakers to set uniform national standards for all lenders, a move that could squeeze less-qualified loan applicants even more.
The widespread problem with subprime mortgages suggests the country needs "a comprehensive response that assures that all lenders are subject to certain baseline requirements," Bair said. "A national anti-predatory lending standard would help assure basic, uniform protections for all borrowers."
The banking regulators testified at a House Financial Services subcommittee hearing on subprime lenders, who offer mortgages to people with spotty credit records or irregular income. Typically, such mortgages include provisions that keep the interest payments moving higher over time.
Between 2003 and 2005, when interest rates were very low and home prices were soaring, lenders began offering many more subprime mortgages to people who likely would not have qualified for traditional 30-year fixed mortgages.
The prevalence of subprime loans among all mortgages shot from 9 percent to 19 percent in that period, according to the FDIC.
Now many of those loans, which had very low "teaser" rates, are ratcheting up. Higher interest rates and declining home prices are making it difficult for homeowners to either refinance or sell their property at a profit. As a result, the FDIC estimates that roughly 14 percent of subprime mortgage payments are 60 or more days past due.
Lawmakers and regulators want to tighten lending standards enough to avoid a repeat of the current problems, but without discouraging the flexibility that has allowed many lower-income workers to become homeowners. Braunstein said imposing tough new rules "could end up cutting off, constraining credit."
Emory Rushton, senior deputy in the Office of the Comptroller of the Currency, agreed, saying that "tighter underwriting will mean fewer and smaller loans."
Bair said Congress should set national rules for two areas. First, it should establish an underwriting standard "based on the borrower's ability to repay the true cost of the loan, not payments based on an artificially low introductory rate," she said. Second, Congress should prohibit "misleading marketing and disclosures that prevent borrowers from fully understanding the terms of loan products," she said.
Members of Congress are becoming increasingly worried because the spiraling defaults are coming at a time when interest rates are still relatively low and the unemployment rate is just 4.5 percent. "This is good times," said Rep. Paul E. Gillmor, an Ohio Republican. "What will happen if we do go over to a recession?"
The regulators said that, so far, they believe that even in harder times, the foreclosure problems would remain confined overwhelmingly to the subprime market, and would not cause a spike in defaults on traditional mortgages. "We don't see a lot of spillover," Bair said.
Mike Calhoun, president of Center for Responsible Lending, a Durham, N.C.-based nonprofit research group, testified that foreclosures will increase in coming months, and that subprime borrowing caused a net loss of about 1 million U.S. homes between 1998 and 2006.
"Homeownership has been thwarted rather than supported" by subprime loans, Calhoun said.
Bloomberg News contributed to this article.