Senator Chris Dodd, who is considering legislation to protect consumers against predatory lenders, told CNBC that two positives have emerged from the subprime meltdown, including better oversight over the beleaguered sector.
"Freddie Mac said they would start rating these pools of securitized mortgages very differently if they come out of this predatory category," Dodd (D-Conn.) told CNBC's Mark Haines. "That in of itself will have a huge impact on people doing a better job of examining who exactly is borrowing the money here."
Dodd also said that regulators, albeit a bit late, have stepped in and started issuing rules that would require "subprime lenders, the predatory lender in the subprime category" to meet the same obligations as prime lenders.
"Those are two very positive things that have happened," Dodd told CNBC's Mark Haines.
Dodd emphasized that there's a vast difference between subprime lending, which he supports, and predatory lenders taking advantage of subprime borrowers, or those with poor credit histories.
"A responsible subprime lender will not cause a problem because they make a determiniation as to whether or not a borrower has the income to meet those obligations," Dodd said. "The predatory lender hasn’t even bothered to ask the question."
On Tuesday, subprime lenders' troubles helped lead the Dow Jones industrials to their second-biggest drop in almost four years.
Investors, bracing for a wilting economy, fled the already deflated subprime mortgage sector on more news that lenders New Century Financial, Accredited Home Lenders and General Motors Acceptance's residential unit are facing financial problems. The Mortgage Bankers Association bolstered the belief that the struggles are widespread after it said new foreclosures surged to an all-time high in the last quarter of 2006.
Though subprime lenders are a relatively small part of the U.S. economy, their difficulties raise larger concerns about the housing market, which until its slowdown in recent years was a big source of money for consumers.
Consumer Buying Power
That, coupled with the Commerce Department's report Tuesday that U.S. retailers eked out a meager 0.1% rise in sales last month, led Wall Street to reconsider whether Americans' buying power will withstand an economic slowdown.
On Wednesday, H&R Block, the nation's largest tax preparer, on Wednesday said its decision to write down the value of its Option One Mortgage unit, a subprime lender that is up for sale, increased the company's third-quarter loss by $15.5 million.
Meanwhile, Impac Mortgage Holdings said the percentage of delinquent loans in its long-term mortgage portfolio doubled to 6.12% last year and warned of a possible cash crunch. Industry observers said the news showed that problems with the riskiest loans in the mortgage industry have spread to borrowers with better credit histories.
Impac's main business is extending loans to borrowers who don't qualify for loans backed by government agencies but who have better credit than subprime customers.