Subprime lenders, regulators face U.S. Senate panel

By Kevin Drawbaugh

WASHINGTON (Reuters) - The U.S. Senate will delve into the problems in subprime mortgage market on Thursday at a committee hearing where federal banking regulators and top lending company officers will face tough questioning.

Connecticut Democrat Christopher Dodd is expected to grill the U.S. Federal Reserve and other agencies over their role in a wave of defaults among subprime borrowers, the shutdown of at least 20 lenders, and fears of wider economic damage.

Managers from major lending companies like HSBC Finance Corp., Countrywide Financial, General Electric's WMC Mortgage unit and First Franklin Mortgage are set to appear at the Senate Banking Committee hearing.

Executives from New Century Mortgage Corp., which faces a federal criminal probe into securities trading and accounting, refused to attend.

Dodd, a presidential hopeful and Senate Banking Committee chairman, on Wednesday laid some of the blame for the problems in the industry on the Fed.

"A pattern of neglect by federal bank regulators ... precipitated the subprime mortgage crisis that could cause 2.2 million homeowners to lose their homes," he said.

Congress may have its work cut out for it on the subprime issue, with Dodd and other lawmakers talking in recent days about protecting borrowers and strengthening housing programs.

Massachusetts Democratic Rep. Barney Frank is targeting late 2007 for passage of a bill to curtail predatory lending like that seen behind the widening mortgage market crunch.

The subprime mortgage sector emerged in recent years to lend money to people with poor credit at high interest rates.

Dodd said that by late 2003, Fed analysts noticed that mortgage lending standards were slipping, raising default and foreclosure risks. But at around the same time, he said, Fed leadership was encouraging development of alternative home loans, such as adjustable rate mortgages (ARMs).

"Soon thereafter, the Fed embarked on 17 consecutive interest rate increases, meaning that people with ARMs were now facing substantial payment shocks in the future," he said.

Dodd called it "a perfect storm that has contributed to the hardship and heartache that millions of homeowners now face."

On Wednesday, fears that high-risk mortgage market turmoil would spread eased somewhat after two battered lenders managed to secure enough money to stay afloat.

For instance, Fremont General Corp. said it was selling $4 billion of subprime residential loans to an unidentified buyer, lifting the company's beleaguered shares.

But it was too early to say whether such fresh funding would keep a lid on the housing debacle, which many analysts worry could have a ripple effect through the U.S. economy.