Obama unveils radical mortgage plan

By Jeremy Grant and Eoin Callan in Washington

Published: August 28 2007 22:04 | Last updated: August 28 2007 22:04

Unscrupulous lenders who deceptively sold subprime mortgages to millions of Americans should be fined and the proceeds used to help bail out borrowers facing a wave of foreclosures, according to Barack Obama, the Democratic senator running to be his party’s presidential candidate.

The proposal is among the most radical yet from a leading Democrat and comes as Washington tries to respond to a growing wave of foreclosures and a crisis in credit markets.

It also comes amid greater discussion in Washington on whether the mortgage industry – including credit rating agencies involved in rating mortgage-related securities – should be more tightly regulated to prevent a repeat of the crisis.

Writing in today’s Financial Times, Mr Obama blamed lobbyists working on behalf of lenders for obstructing tougher regulation of the subprime industry, adding: “Our government failed to provide the regulatory scrutiny that could have prevented this crisis.

“While predatory lenders were driving low-income families into financial ruin, 10 of the country’s largest mortgage lenders were spending more than $185m (€136m, £92m) lobbying Washington to let them get away with it,” he wrote, citing figures from the Centre for Responsive Politics.

Wall Street banks have also stepped up their lobbying over the issue of subprime lending as their underwriting practices come under scrutiny. It emerged this week that Citigroup paid $160,000 in the first half of this year for lobbying services from Ogilvy Government Relations.

Mr Obama said the government needed to “stop the unlicensed, unregulated, fly-by-night mortgage brokers who are hoodwinking low- income borrowers into loans they can’t afford”.

He added that “Washington needs to stop acting like an industry advocate and start acting like a public advocate”.

Curtailing undue corporate influence on policymaking in Washington is one of Mr Obama’s signature issues.

Mr Obama’s proposal is one of many to have emerged in recent weeks from Democrats as they seek to take advantage of what they see as a potential weakness in the Bush administration’s response to the subprime crisis.

Christopher Dodd, Senate banking committee chairman, and Barney Frank, who heads the House financial services committee, have called on the administration to allow giant mortgage lenders Fannie Mae and Freddie Mac to step in by lifting caps on their mortgage portfolios.

The administration opposes such a move, arguing that Congress must first pass pending legislation reforming how they are overseen. It favours less radical steps such as expanding a loan insurance scheme already operated for decades by the Federal Housing Administration.

Ethan Harris, an economist at Lehman Brothers, said: “There needs to be rationalisation – more centralisation – of how mortgage lending is regulated.”