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Fed Action on Mortgages May Create New Perils

Foreclosures in May were up 90% over the year-ago period. The Federal Reserve will meet Thursday to discuss taking action against alleged mortgage lending abuses. Should it? Robert McTeer, former president of the Federal Reserve Bank of Dallas, and John Taylor, president and CEO of the National Community Reinvestment Coalition, took sides in a "Power Lunch" debate.

McTeer believes that if actual fraud has been committed by lenders -- and if the misdeeds fall under the Fed's jurisdiction -- then the central bank ought to take action.

But he told CNBC's Sue Herera that the best scenario involves lenders and borrowers realizing their mutual "incentive" to "work things out one-on-one." McTeer, who currently sits as Distinguished Fellow at the National Center for Policy Analysis, said solving problems within the private sector is "far superior" to creating new regulations and "intrusions" by the government.

Taylor disagreed, saying predatory practices, especially in the subprime arena, have reached "catastrophic proportions."

He cited projections that 2 million U.S. families will face foreclosures over the next 12 months, and warned that the impact could go far beyond the domestic sphere. Taylor pointed to the "international news" that investors are "running away" from mortgage portfolios -- and the impact to U.S. economic health may still be unknown.

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