World and Nation

Policymakers Propose Stronger Mortgage Rules

The nation’s top economic policymakers, hoping to prevent a repeat of the excesses that led to the mortgage bubble and bust, on Thursday proposed a broad series of reforms aimed at tightening oversight of financial institutions.

The changes include tougher disclosure requirements for banks and Wall Street firms, a nationwide licensing system for mortgage brokers and new rules for credit rating agencies, which have been widely criticized for failing to recognize major problems with mortgage-backed securities and for having potential conflicts of interest.

“This effort is not about finding excuses or scapegoats,” said Treasury Secretary Henry M. Paulson Jr., who outlined the proposals in a speech here on Thursday morning. “But poor judgment and poor market practices led to mistakes by all participants.”

The recommendations were developed by the President’s Working Group on Financial Markets, a group that includes the Treasury secretary, the chairman of the Federal Reserve and the government’s top financial regulators.

Paulson said the government was going to demand greater “transparency” from banks and Wall Street firms, stronger risk management and capital management and a better trading system for complex financial derivatives, such as collateralized debt obligations, that managed to transform risky subprime mortgages into securities with Triple-A ratings.

Echoing measures that congressional Democrats have been drafting, the presidential group called for tougher state and federal regulation of mortgage lenders and a nationwide set of licensing and registration standards for mortgage brokers.

That reflects a widespread criticism by many experts and policymakers, who have argued that millions of mortgages were originated by independent mortgage brokers who often had no concern about credit quality because they simply passed the mortgages to finance companies that in turn resold them to Wall Street firms and ultimately investors around the world.

Paulson took particular aim at credit-rating agencies, such as Moody’s, Standard & Poor’s and Fitch, which gave Triple-A ratings to billions of dollars in mortgage-backed securities that turned out to be filled with delinquent loans.

Paulson said the rating agencies would have enforce policies about disclosing their conflicts of interest, an allusion to criticisms that the agencies were typically paid for their ratings by the investment banks who only paid once they had sold their securities to investors.

In addition, Paulson said the president’s group would push the rating agencies to “clearly differentiate” between the ratings for complicated structured investment products, which investors may not have understood, and the ratings for more conventional corporate bonds and municipal securities.

Issuers of mortgage-backed securities, in turn, would be required to disclose “more granular information” about the quality of the underlying loans and their procedures for verifying the information in those loans.