A coalition of housing groups and advocates for the poor on Thursday warned of a growing “mortgage tsunami” affecting millions of Americans, particularly minorities, as fears rose that rising defaults could spill over into the broader economy.
The National Community Reinvestment Coalition said tougher laws are needed to protect consumers from lenders pushing high-interest home loans, adding that federal regulators and members of Congress had ignored warnings for years about a potential wave of defaults in risky loans.
“We have for many years urged Congress and urged those who are responsible to take action,” said John Taylor, president of the coalition, which includes 640 groups nationwide. “Frankly, it’s appalling what they haven’t done. ... Today we call on the (Bush) administration and the Congress to take back the reins.”
The warning was the latest development in a growing wave of concern over so-called subprime mortgages given to buyers with poor credit histories during the housing boom of the past few years. Now that housing prices are stabilizing or falling in some markets, many of those mortgage holders are defaulting, saddling the lenders with crippling losses.
Former Federal Reserve Chairman Alan Greenspan said Thursday there was a risk that the rising defaults could spill over into other economic sectors.
Speaking to the Futures Industry Association in Boca Raton, Fla., Greenspan conceded it was “hard to find any such evidence” about spillover from stressed mortgages yet, but added: “You can’t take 10 percent out of mortgage originations without some impact.”
And Merrill Lynch warned that house prices could tumble 10 percent this year and raise the risk of recession unless the Fed cuts interest rates to cushion the fall in economic growth.
Members of the housing coalition said Thursday the Federal Housing Administration should work with banks to refinance risky loans with high interest rates in order to help consumers avoid foreclosure.
Taylor blasted “exotic nontraditional mortgages that are designed to strip wealth” rather than allow homeowners to build up equity in their properties.
Speaking at the group’s annual meeting in Washington, New York Sen. Hillary Rodham Clinton, a Democratic presidential candidate, said lenders should be required to clearly explain the terms of mortgages to borrowers, particularly for loans in which the rate can soar after the first few years.
“This market is clearly broken, and if we don’t fix it, it could threaten our entire housing market, which in turn would threaten our entire economy,” Clinton said.
Some lawmakers already are considering tougher standards for risky mortgages, while the Securities and Exchange Commission is examining accounting errors at New Century Financial Corp., which is the second-largest subprime lender and is facing possible bankruptcy.
Adding to the concern, the Mortgage Bankers Association said this week that late mortgage payments shot up to their highest level in more than three years and new foreclosures surged to a record high as borrowers with tarnished credit histories had trouble keeping up with their monthly payments.
Greenspan said the downturn in U.S. housing markets appeared to stem more from high housing prices than from a decline in mortgage quality but said he was not downplaying problems in so-called subprime loans.
He said that subprime woes were “not a small issue” and seemed to result primarily from buyers coming into lofty housing markets late after big price run-ups that had left them vulnerable to hikes in adjustable mortgage rates.
Merrill Lynch said the biggest concern is that tighter lending standards in the mortgage market, even if confined to lower-quality borrowers, will constrain overall housing demand and hamper recovery in the struggling housing market.
The brokerage said in a research note that a 10 percent decline in home prices would slow the economic expansion to a rate of about 1.5 percent to 1.75 percent this year, which it termed a “growth recession.”
Without rate cuts of 1 percentage point in the second half of 2007 that are expected by the brokerage’s analysts, the probability of an outright recession in the second half of the year was put at “very close to 100 percent.”
The House subcommittee that oversees financial institutions is scheduled later this month to hold a hearing on the mortgage industry’s turmoil.