US Federal Reserve targets 'abusive' mortgages

THE US Federal Reserve proposed tough new rules overnight in a broad crackdown on abusive mortgage lending practices almost two years into one of America's worst housing downturns in decades.
The central bank is racing to tighten up the rules governing the trillion-dollar mortgage market as US home sales continue to fall and property foreclosures spike across the country.

Fed chairman Ben Bernanke said the central bank was moving to clean up mortgage lending while also aiming to protect unwary home buyers from potential fraud.

"Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities and, indeed the economy as a whole," Mr Bernanke said.

Some of the Fed's proposed rules specifically address "subprime" home loans granted to Americans with patchy credit and scant savings.

Defaults on subprime mortgages have been responsible for hundreds of thousands of home foreclosures this year that could create shockwaves for the US and global economies.

Treasury plan

Bernanke unveiled the Fed's proposals a week after US President George W. Bush endorsed a Treasury-brokered plan that could help up to 1.2 million distressed homeowners at risk of losing their homes to foreclosure.

The Treasury-backed initiative would help struggling homeowners refinance subprime loans or freeze the interest rates on their loans for up to five years.

"We do expect that the housing market turbulence will take some time to work through, and that there will be some penalty on our short-term economic growth," Treasury Secretary Henry Paulson said.

The Fed said it was acting because the mortgage market and its financing had become more complex in recent years, especially as big Wall Street banks had sliced up and traded large mortgage loan portfolios.

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