March 22, 2007 / 2:03 PM / 12 years ago

U.S. states oppose bailout to subprime lenders

WASHINGTON (Reuters) - Congress should not bail out subprime lenders and brokers who made risky mortgage loans to borrowers with bad credit, but lawmakers can take several steps to protect consumers going forward, a representative of the Conference of State Bank Supervisors said on Thursday.

An auctioneer reads a public notice before taking bids on a foreclosed home (rear) in Lynn, Massachusetts March 19, 2007. REUTERS/Brian Snyder

“I strongly encourage Congress to avoid using taxpayer funds to bail out the subprime lenders, brokers and investors that generated our current problem,” Joseph Smith, the North Carolina Commissioner of Banks, said in remarks prepared for a Senate hearing.

Brown said subprime borrowers with home equity and incomes to support reasonable mortgages can refinance their loans. But borrowers with no-money-down loans and little income are in an “unsustainable” situation, he said. “Without a massive government bail-out, these mortgage loans will likely result in foreclosure.”

Brown also urged Congress to require lenders to set a default loan for subprime borrowers at a 30-year fixed rate, and to modernize the Federal Housing Administration (FHA) so that it can lend to some subprime borrowers. Lawmakers should also take the step of requiring lenders to consider a borrower’s ability to repay a loan before making one, he said.

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