Sen. Clinton calls for subprime mortgage action

Senator and Democratic Democratic presidential hopeful Hillary Rodham Clinton (D-NY) addresses the International Association of Firefighters Bipartisan 2008 Presidential Forum in Washington, March 14, 2007.

WASHINGTON (Reuters) - Presidential hopeful Hillary Clinton called on Thursday for incentives for U.S. lenders to identify troubled mortgages, offer "a foreclosure timeout" and possibly revise repayment terms amid the widening subprime mortgage crisis.

The New York Democrat also said she would soon reintroduce legislation to modernize the Federal Housing Administration (FHA), which guarantees mortgages so that low-income home buyers can receive lower interest rates.

Separately, the chairman of the powerful Senate Banking Committee said his panel would soon hold a hearing to look into the crisis in the subprime sector of the U.S. mortgage market.

Christopher Dodd, a Connecticut Democrat who is also a U.S. presidential hopeful, said he would seek answers from federal and state officials as well as industry figures.

"I will continue to approach this crisis in a thorough and aggressive manner," Dodd said in a statement.

At least 20 lenders in the subprime mortgage sector, which serves borrowers with poor credit histories at high interest rates, have gone out of business due to rising default rates and falling home prices.

The crisis has triggered broad concerns that subprime fallout may spread to mainstream lenders and hurt the economy.

Clinton favors raising FHA loan limits for high-income areas to help more low-income home buyers.

"I also propose a stop to prepayment penalties designed to trap borrowers," Clinton said in a speech to the National Community Reinvestment Coalition. She is a member of the Senate Committee on Health, Education, Labor and Pensions.

The coalition recommended in a statement that the FHA be allowed to refinance subprime borrowers' loans in default to prevent "a torrent of defaults and foreclosures expected to deluge the mortgage market."

The group of low-income housing advocates called for the establishment of a national rescue fund to support low-income borrowers, stronger consumer laws and an end to exotic loans and incentives for bad lending practices.

The coalition said millions of Americans may lose their homes this year, with thousands of housing industry workers losing their jobs.

"An estimated 100 additional subprime mortgage companies may go under," it said.

Clinton blamed the Bush administration for overlooking problems in the subprime mortgage market. Republicans were too focused on providing tax cuts for the rich, she said.

"We've got to take action ... the economy is not supporting home ownership the way we need it to," Clinton said, adding that the FHA should give consumers more counseling and information on mortgages.

Clinton called for finding ways to get lenders to identify borrowers who are having trouble making their payments and to arrange help for them through revised repayment terms.

"Unfortunately, homeowners in distress often simply miss payment after payment and eventually lose their home. A better alternative would be to create incentives for lenders to identify troubled mortgages and to work out solutions before foreclosure," she said.

"For example, give borrowers a period of a foreclosure timeout, during which borrowers will have the opportunity to put their financial houses in order and to work out a payment plan."

(Additional reporting by John Poirier)