March 21, 2007 / 12:01 AM / 12 years ago

EXCLUSIVE: FDIC says subprime woes to affect bank earns

WASHINGTON (Reuters) - The head of the U.S. Federal Deposit Insurance Corp. defended on Tuesday the agency’s handling of the subprime mortgage crisis but said rising default rates will hurt some U.S. banks’ earnings.

In an interview with Reuters, FDIC Chairman Sheila Bair said FDIC-insured financial institutions were not at risk of failing due to exposure to mortgages provided to customers with poor credit histories.

However, Bair said she expects the subprime crisis will affect some U.S. banks’ earnings. “Certainly they’re going to be earnings repercussions from this but we are not seeing risk beyond that at this point,” Bair said.

The FDIC insures deposits at about 8,800 banks and savings associations. It directly examines and supervises about 5,250 institutions and is the primary federal regulator of state-charted banks that are not part of the Federal Reserve System.

“We’re closely monitoring obviously, but at this point, I don’t see any problems other than ... a hit to banks’ earnings,” Bair said.

The FDIC and other federal bank regulators supervise about 42 subprime mortgage lenders with 25 percent or more of their capital in subprime mortgage loans, the agency said.

Bair said that when the FDIC and other federal regulators issued proposed regulations on March 2 to tighten rules for subprime lending, they acted in a measured way to avoid an excessive tightening of credit availability.

“Going forward, I don’t want the market to overreact,” Bair said. “We support responsible subprime lending.”

Default rates in the subprime segment of the U.S. mortgage market have jumped recently amid a housing industry slowdown. At least 20 subprime lenders, which serve borrowers with poor credit at high interest rates, have quit or sold their businesses.

The crisis has triggered broad concerns that fallout from the industry may spread and damage the economy.

Earlier on Tuesday, the chairman of the Senate Banking Committee wrote letters to Bair and other banking regulators, demanding that they explain their handling of the subprime lending crisis. Democrat Christopher Dodd of Connecticut, who is also a presidential hopeful, will hold a hearing on the issue on Thursday.

Bair said that Sandra Thompson, the FDIC’s director of supervision and consumer protection, will testify at the hearing that the agency acted responsibly and quickly when bank examiners spotted violations.

Thompson will also tell the hearing that regulators and lawmakers should focus on helping people transition from adjustable rate mortgages to 30-year fixed rate mortgages, Bair said.

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