TOPICS > Economy

Bernanke to Propose Stricter Mortgage Regulation

BY Admin  July 8, 2008 at 12:30 PM EDT

Fed Chief Ben Bernanke speaks at FDIC; AP photo

The Federal Reserve will issue the much-awaited rules next week as the policymaking board crafts a response to the housing crisis that has swept the U.S. financial sector.

Bernanke discussed the proposed new regulations in a speech Tuesday, a day after markets were roiled by the plummeting shares of mortgage financing leaders Fannie Mae and Freddie Mac.

“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 in remarks prepared for delivery to the Federal Deposit Insurance Corp.’s forum on mortgage lending for low-income households in Arlington, Va.

Bernanke said the Fed will adopt rules cracking down on a range of lending practices that have forced foreclosures for many of the nation’s “subprime” borrowers — those with weak credit or low incomes — who were hardest hit by the housing and credit crunch, the Associated Press reported.

Under a plan unveiled last December, the rules would, in part, bar 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 restrict lenders from making loans without proof of a borrower’s income, according to the AP.

“The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning,” Bernanke planned to say. “It is not too soon, however, to begin to think about the steps we might take to reduce the incidence and severity of future crises.”

Bernanke also planned to call on Congress to more clearly outline the powers of agencies that regulate Wall Street.

“Legislation may be needed to provide a more robust framework for the prudential supervision of investment banks and other large securities dealers,” Bernanke said, according to the Washington Post.

The plan, which will be voted on at a Fed board meeting on Monday, would apply to new loans made by thousands of lenders, including banks and brokers.

In a rare move aimed at averting a deeper financial crisis, the Fed in March agreed to let investment houses go to the Fed — on a temporary basis — for a quick boost of cash. Those loans are supposed to last through mid-September.

The Fed’s decision to act as a lender of last resort for Wall Street firms was made after a run on investment house Bear Stearns pushed the bank to the brink of bankruptcy and raised fears of a domino effect in the investment industry. Bear Stearns was eventually taken over by JPMorgan Chase & Co., with the Fed providing $28.82 billion in financial backing.

“We saw what happened to Bear Stearns in March,” Roben Farzad of BusinessWeek Magazine told the NewsHour in June. “In a matter of minutes, hours, its stock fell from the $50s and $60s to $2. It was forced at gunpoint, essentially, by the Federal Reserve to be taken over by JPMorgan Chase, in kind of a near-death experience.”

Bernanke spoke of that bailout decision on Tuesday.

“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,” he said.

“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,” the Fed chief said.