U.S. regulators who failed to restrain excessive lending in the subprime mortgage market may be able help defaulting borrowers from losing their homes by persuading banks to avoid rushing to foreclosure.
While U.S. house prices were rising in the past five years, Wall Street investors rushed into the mortgage market by bankrolling companies that made risky loans to less creditworthy borrowers.
Those loans were often bundled into mortgage backed securities and sold off to investors who farmed out the debt collection work to mortgage servicers, but because the mortgages were not funded by bank deposits, U.S. regulators had little say over lending criteria.
While many of the mortgage lenders that originated subprime loans have now gone out of business, the companies servicing the loans are still in business, and the nation’s largest banks are among their ranks.
Bank regulators may have untapped authority to scrutinize banks’ servicing practices and can pressure them to be lenient on defaulting borrowers, analysts said.
“Can the bank regulators do anything with the servicer? The answer is ‘yes’,” said Gene Ludwig, a former bank regulator who now heads Promontory Financial Group in Washington.
The regulators “should hold the servicers’ and the investors’ feet to the fire,” Sheila Bair, chairman of the Federal Deposit Insurance Corp., said at a congressional hearing last week.