updated 5/23/2007 10:51:28 AM ET 2007-05-23T14:51:28

A high-ranking Treasury Department official on Wednesday chastised mortgage lenders for too-often failing to verify the income of borrowers with blemished credit histories, blaming the practice for rising defaults and foreclosures.

Comptroller of the Currency John C. Dugan said federal banking regulators need to give the industry guidance for improvement in this area, though he did not offer a specific remedy.

"Sound underwriting and, for that matter, simple common sense suggests that a mortgage lender would almost always want to verify the income of a riskier subprime borrower to make sure that he or she had the means to make the required monthly payments," Dugan said in a speech to a New York housing group.

"But the norm appears to be just the opposite," said Dugan, whose agency regulates nationally chartered banks. "Nearly 50 percent of all subprime loans last year accepted stated income," meaning the underwriters did not verify the information provided by borrowers on loan applications.

Federal Reserve Chairman Ben Bernanke said last week that the central bank is considering tougher rules to reduce abusive home loan practices even though he believes the economy should escape without significant harm from the problems in the market for subprime mortgages, or loans made to borrowers with shaky credit histories.

In March, the Fed and the other four federal agencies that regulate banks, thrifts and credit unions — including the Office of the Comptroller of the Currency — proposed guidelines that call for strict evaluations of a borrower's ability to repay, among other recommendations.

The guidelines, which would affect big lenders such as Countrywide Financial Corp. and Washington Mutual Inc., have not yet been made final. The Fed plans a mid-June hearing on ways to curb abusive lending practices.

Lenders catering to home buyers with shaky credit have seen a spike in defaults on payments in the past year, and more than 30 subprime lenders — those catering to borrowers with shaky credit histories — have gone bankrupt this year. Major lenders have tightened standards for borrowers since February, when parts of the mortgage market fell into disarray.

RealtyTrac Inc., an industry research firm, said last week that mortgage lenders foreclosed on 62 percent more U.S. homes in April than a year ago.

Home prices are slipping too. The national median existing single-family home price in the first quarter was $212,300, down 1.8 percent from a year ago when the median price was $216,100, according to the National Association of Realtors. The median is a typical market price where half the homes sold for more and half the homes sold for less.

Dugan's speech came one day after trade groups representing mortgage bankers and brokers traded barbs over who should be blamed for the housing market's woes.

The head of the mortgage banking industry's trade group claimed mortgage brokers and lenders focused only on short-term profits benefited from the housing boom, but didn't do enough to examine whether borrowers could repay.

Harry Dinham, president of the National Association of Mortgage Brokers, replied by saying that, because most residential mortgage loans are quickly resold to investors, most lenders are actually "just brokering the transaction but afraid or ashamed to admit it."

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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