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Sen. Dodd Contends Fed Was 'Lax' In Policing Subprime Loans

Senate Banking Chairman Christopher Dodd (D-Conn.) told CNBC that he believes the Federal Reserve was lax in its responsibilities by not preventing the surge of subprime mortgage loans.

"We've got a serious problem with a lot of potential foreclosures out there," said Dodd, who is also a presidential candidate. "The question is, how can we keep people in their homes?"

Dodd announced that he will meet with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson on Tuesday morning to discuss financial market volatility and its implications for the U.S. economy. They'll also discuss steps that might help stabilize mortgage and financial markets and aid U.S. homeowners.

A press conference will follow the closed-door meeting and be carried live by CNBC.

"Hank Paulson knows this issue very well and knows what needs to be done here," Dodd said.

The candidate for the Democratic nomination said he's backing a bill that would establish "low-interest-rate, safer" mortgage loans, in hopes of sparing borrowers -- and the market -- from the risks involved in subprime lending.

"We hope to get that legislation up early in September," Dodd said.

Despite his criticism of the Fed, Dodd conceded that "they're moving now and providing help."

Dodd told CNBC that he favors criminal charges for certain so-called "predatory" lending practices: "Certainly I do. I think some of these activities that went on were violations of basic principals."

The senator also pointed to a "major issue -- the idea that credit rating agencies were being paid by the very people that they are rating."

"Something has to be done about that. I'm deeply worried," Dodd said.

On Friday, the Federal Reserve cut the discount lending rate -- the interest rate that the Fed charges when making direct loans to banks -- to 5.75 percent from 6.25 percent. In the wake of that cut, the Dow Jones industrial average shot up more than 300 points in early trading, before slipping slightly to close up nearly 2 percent.

"Lowering the discount rate was important. Calming here is important -- not overreacting," he said.

"The liquidity issue is very, very important," Dodd said. "I'd like [the Fed continue] to monitor and watch this. This is where we've had some difficulty."


Amid tightening credit markets -- which make the situation of secondary mortgage lenders such as Countrywide Financial that much more precarious -- some analysts have called for raising the portfolio cap on government-backed mortgage giants Fannie Mae and Freddie Mac.

The portfolio cap is the ceiling on mortgage bonds Fannie Mae and Freddie Mac are permitted to buy and hold. Currently, the cap for Fannie Mae is $727.2 billion; Freddie Mac is capped at a 2 percent annual growth rate on its current $712.1 billion portfolio.

Dodd suggested that the final authority on raising the portfolio cap for Fannie Mae and Freddie Mac should lie with the White House and the secretary of the treasury.

"I'm not suggesting that this be done immediately -- just that the authority be there," the senator said.

Countrywide, the largest U.S. mortgage lender, said last week it drew down an $11.5 billion bank credit line after losing some access to short-term borrowings. On Monday, it was reported that the bank began enacting employee layoffs to help offset the credit squeeze.

And after market close Monday, Capital One Financial said it will shut its wholesale mortgage unit, resulting in $860 million in charges in 2007. The company, which said some 1,900 positions will be eliminated, will "cease residential mortgage origination" at its GreenPoint Mortgage unit, effective immediately.

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