With same CEOs in charge and loose rules, another mortgage crisis looms

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Five years after the financial crisis, many of the same top executives are running the biggest subprime lenders and new rules are doing nothing to discourage another wave of people flocking to risky adjustable-rate mortgages.

The Center for Public Integrity found that brass, including 14 founders or CEOs, from the top 25 lenders blamed for nearly $1 trillion of subprime loans, are back at mortgage companies that are less regulated than banks.

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Even as big banks downsize their mortgage operations and Wells Fargo, Bank of America and J.P. Morgan Chase slash jobs, there are plenty of major companies offering the same – if not riskier -- loans that fueled the first meltdown.

There is little threat to curb the same practices as no Wall Street CEO was jailed after the first mortgage crisis. The Securities and Exchange Commission charged Angelo Mozilo, then chief executive of Countrywide, with insider trading and securities fraud in 2009, but he got off with $67.5 million in fines and a lifetime ban from serving as an officer of a public company. A criminal investigation was dropped.

Today, Stanford L. Kurland, who was second in command at Countrywide from 1979 to 2006, is founder, chairman and CEO of PennyMac, an investment firm and real estate investment trust that he founded with other Countrywide alumni.

Meantime, mortgage experts expect rates will continue to climb while ARM borrowers are being approved at interest rates that are far lower than what they could end up paying.

The most popular ARM, which has a fixed rate for the first five years before becoming variable, may be pegged to the one-year Libor, which is down to 0.67%, and a margin of 2.25 percentage points, resulting in a 2.92% rate – or below the current average introductory rate on 5/1 ARMs of 3.5%, according to mortgage-info website HSH.com.

And it could get worse from there. During the sixth year of a 5/1 ARM, the rate can jump by as much as five percentage points, which means those who agree to a 5/1 ARM now with an initial rate of 3.5% could ending u paying as much as 8.5% in 2018.

The Consumer Financial Protection Bureau, established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, added a rule that requires lenders to consider highest possible rate within the first five years, but most ARMs have a five-year teaser rate that won’t impact loan approvals.

As more borrowers pour back into the market, banks and other lenders take on more risk, even as they swim in lawsuits stemming from the last crisis.

Last month, six U.S. government agencies, including the Federal Reserve and the FDIC, proposed easing a rule in Dodd-Frank that will make it easier for banks to pass off the losses they have on no-money-down home loans onto the federal government, at least for now, and investors. A month earlier, the Fed nixed a rule that would have forced banks to put aside additional capital when making subprime loans in an effort to cover potential losses.

In the U.K., gross mortgage lending increased 12% in July to £16.7 billion, up from £14.9 billion in June and 29% from last July, according to the latest survey figures from the Council of Mortgage Lenders. Activity is expected to slow at the end of the first quarter 2014 when revised Mortgage Market Regulations are implemented.

The European Union on Thursday overwhelmingly approved a law that puts about 150 of the euro zone’s largest banks under the scrutiny of the European Central Bank, the New York Times reported.

Follow the author on Twitter @natashagural

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