Congress demands action on subprime regulation

Representatives target so-called "liar loans"

Senior members of the US Congress sent a letter to US banking regulators expressing their concerns about the state of the subprime mortgage market on Wednesday.

Congressman Spencer Bachus (R-AL) the ranking member of the House Financial Services Committee, Congressman Paul Gillmor (R-OH) the ranking member of the Subcommittee on Financial Institutions and Congresswoman Judy Biggert (R-IL) the ranking member of the Subcommittee on Housing are following up on a series of speeches made by regulators in recent days on the failure of several large subprime mortgage lenders in recent weeks.

The letter said, “As Members of Congress closely monitoring the work of the bank regulators on solutions to the turmoil in the subprime mortgage market, we were interested to see Comptroller Dugan’s recent remarks on stated income loans, or “liar loans”, and are deeply concerned about the explosion in originations of these mortgages in the subprime market.”

“There has been, and will continue to be, a small niche for these types of loans to be made. The serious problems arise when you combine these low-doc or no-doc loans with a high LTV and penalties which make the risk of default much more likely. As the Comptroller points out, the market conditions of two years ago may have led both homebuyers and mortgage originators to believe that no-doc loans would be less risky as borrowers could grow their way to a different product.

When home values are increasing rapidly, a lot of bad loans are hidden. Current circumstances in the housing market have exposed these poorly underwritten loans and we would ask the regulators to closely examine the role an expanded use of “liar loans” may have played in the subprime market defaults we are experiencing.”

“We would request an update as to your intentions in this particular area and hope that you will continue to evaluate guidance that will encourage a tightening of standards without installing roadblocks to home-ownership.”