Stricter Mortgage Rules Proposed

WASHINGTON (AP) -- Economic policymakers on Thursday recommended stricter regulation of mortgage lenders as part of a broad effort to prevent a repeat of a credit crisis threatening to drive the country into recession.

With problems in the credit and housing markets worsening, the Bush administration now seems to favor a larger role for government - an approach Republicans generally have had little appetite for.

Recommendations from a presidential advisory group on financial markets cover mortgage lenders and other institutions, as well as investors, credit ratings agencies and regulators.

Treasury Secretary Henry Paulson, who leads that group, said the effort is not about "finding excuses and scapegoats." The suggested actions, he said, are intended to avoid another meltdown in the credit and housing markets.

"The objective here is to get the balance right - regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," Paulson said.

Federal and state regulators should strengthen oversight of mortgage lenders, according to the group's report released Thursday. Also, states should follow strong, uniform licensing standards for mortgage brokers. No such nationwide system exists, although legislation in Congress would create one.

Sen. Charles Schumer, D-N.Y., said administration officials are "beginning to put their toe in the water when it comes to government involvement to help the economy. The bad news is they're going to have to do a lot more than that to address the problem."

Other recommendations urge improvements by credit rating agencies, criticized for not accurately assessing risk on complex mortgage investments. These kinds of business transactions soured, causing market chaos. The report also suggests clearer disclosures and assessments of risks on investments.

Greg McBride, senior financial analyst at Bankrate.com, likened the recommendations to "putting up a traffic light only after a series of auto accidents."

"It is purely reactionary," he said. "The ideas themselves are not necessarily new but the pressure to do something is growing as housing problems become more pronounced."

The housing and credit woes have shaken Wall Street, propelled home foreclosures to record highs and forced financial companies to absorb multibillion losses on bad investments in mortgage-backed securities. For the first time since 2001, recession is a serious threat.

Federal Reserve Chairman Ben Bernanke said the proposals are "an appropriate and effective response to the deficiencies in our financial framework that contributed to the current turmoil in financial markets." The central bank chairman serves on the advisory group, created after the 1987 Wall Street crash to monitor markets, as do the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Paulson said in a speech at the National Press Club that the report "is not about finding excuses and scapegoats. Those who committed fraud or wrongdoing have contributed to the current problems; authorities need to, and are prosecuting them. But poor judgment and poor market practices led to mistakes by all participants."

The next step, Paulson said, is to push to get the recommendations in place. The administration did not lay out a timetable; analysts said the process could drag on for months.

Answering questions after his speech, Paulson hewed to the position of past secretaries when he said a strong dollar is in the national interest.

The dollar dropped to a new low Thursday against the euro and a 12-year low against the Japanese yen. That helps sales of U.S. exports to foreign buyers because it makes U.S. goods less expensive. But the drooping dollar increases inflationary pressures.

The advisory group also recommended that credit-rating agencies differentiate between ratings on complex investment products and conventional bonds. The ratings agencies also should disclose conflicts of interest, Paulson said.

SEC Chairman Christopher Cox said Congress recently gave the SEC the power to address issues including conflicts of interest involving credit-rating agencies. "We will use that authority to help restore investor confidence," he said.

To Paulson, "there is no single, simple solution to the problems that have emerged ... yet we have determined that market participants' behavior must change."

The financial problems started with certain home loans, known as subprime mortgages, that are made to people with tarnished credit histories or low incomes.

These borrowers got clobbered when the housing slump dragged down home prices and mortgage rates rose. Foreclosures and late payments soared as these borrowers found it difficult, if not impossible, to make monthly mortgage payments.

Easy credit during the housing boom allowed people to move into homes that they otherwise could not afford. The mess later spread to more creditworthy borrowers.

"The turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into early 2007," the advisory group said. "But the loosening of credit standards and terms in the subprime market was symptomatic of a much broader erosion of market discipline on the standards and terms of loans to households and businesses," the group said.

Paulson said market difficulties often expose weaknesses that experience can help overcome. "That experience often comes from lessons learned from prior challenges and prior mistakes," he said.

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On the Net:

President's Working Group on Financial Markets report: http://tinyurl.com/2exje6

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