By Craig Torres and Scott Lanman

March 27, 2007

The Federal Reserve has “great concern” about the surge
in mortgage delinquencies and foreclosures, said Sandra Braunstein, director of
the Fed’s Division of Consumer and Community Affairs.

“The impact of mortgage delinquency and foreclosure on
consumers and communities is one of great concern,” Braunstein said in
testimony to a House Financial Services subcommittee hearing on subprime
mortgages in Washington. “We
have much work ahead of us, as there is no one sure and easy fix.”

Congress has been critical of federal bank regulators in
recent weeks for failing to curb lax lending standards during the biggest
mortgage boom in American history, which led to rising foreclosures and
delinquencies. Last week, Senate Banking Committee Chairman Christopher Dodd, a
Connecticut Democrat, said the Fed failed to act on early signs of trouble.

Braunstein said the Fed must tackle lending practices
while also making sure they are flexible enough to help borrowers restructure
or refinance debt instead of facing foreclosure on their homes.

“A robust and disciplined subprime market is vital to
ensuring continued progress in broad access to credit and homeownership,” said
Braunstein, who has held her position since 2004. “We will continue to pursue
opportunities to help borrowers and to preserve access to responsible

Roger Cole, the Fed’s director of banking and
supervision, told the Senate Banking Committee at a March 22 hearing that the
Fed “could have done more sooner” to curb loose lending standards. Parts of
Braunstein’s prepared testimony were similar to Cole’s.

Braunstein is one of 12 witnesses scheduled to testify at
today’s hearing.

Delinquencies Rise

Borrowers were late on 13.3 percent of loans to borrowers
with poor or limited credit records last quarter, the highest delinquency rate
since September 2002. The late payments are occurring at a time of economic
growth and a low unemployment rate of 4.5 percent, suggesting that poor underwriting
standards caused the crisis.

Braunstein and former Fed Governor Mark Olson presided
over hearings on home lending in four cities last year. Consumer advocates
related specific examples of predatory lending and fraud.

“The primary driver of rising foreclosure rates has been
increased levels of subprime lending,” Geoff Smith, research director at the
Woodstock Institute, an economic development organization, told Braunstein at a
June 7 hearing last year in Chicago. Almost a year later, Smith said he is
“disappointed” at the Fed’s response.


“It is disappointing that it took the collapse of the
stocks of these companies to pay any attention to the crisis that has been
building for a long time,” Smith said in an interview yesterday. “We
testified at Federal Reserve hearings, we testified at Congressional

Braunstein said the Fed will start a review this year of
mortgage-cost disclosures that consumer advocates cited at the hearings as a concern.
In the meantime, the central bank has taken “more immediate steps,” including
revising a consumer handbook on adjustable-rate mortgages and publishing a
consumer- education brochure.

Braunstein’s division is in charge of writing consumer
protection rules in collaboration with the legal division and subject to
approval by Fed governors. She is also the Board’s liaison to community groups
and consumer advocates. She reports to Randall Kroszner, the governor who
serves as the board’s point-person for banking regulation.

Cole told lawmakers last week that the Fed intensified
its supervisory reviews of mortgage lending from 2004 to 2006. The Fed issued
three public enforcement actions related to mortgage lending, Cole said, and
took three actions it didn’t make public.

Two of the public steps related to mortgage-security
accounting issues at companies in Puerto Rico. The third
was a $70 million action against a Citigroup Inc. unit stemming from loans in
2000 and 2001, before the mortgage-boom began.

Among other agencies regulating banks are the Federal
Deposit Insurance Corp., the Office of Thrift Supervision, the National Credit
Union Administration, and the Office of the Comptroller of the Currency.

The OCC, which supervises 1,793 national banks, took only
three public mortgage-related consumer-protection enforcement actions from 2004
to 2006, according to a review published by Bloomberg earlier this month.