WASHINGTON (AP) – May 21, 2007 – Federal banking regulators are giving lenders more flexibility when they restructure high-interest rate mortgages given to home buyers with poor credit.

The effort by the Office of Thrift Supervision and other agencies is aimed at softening the impact of the housing market’s slowdown and bolsters the argument of lawmakers who say mortgage reforms may not be needed.

While it may also result in accounting charges on quarterly earnings reports of public companies with mortgage lending units later this year, it could limit the economic fallout from the overaggressive mortgage practices of the past few years.

Experts say it could also save lenders money in the long run because it costs less to refinance a loan than to foreclose on a house that might not easily sell.

An OTS spokesman says the agency’s work with lenders is part of normal regulatory oversight, but its willingness to be a bit more lenient comes as home prices and the pace of home sales nationwide are down sharply compared with last year and foreclosures are surging.

Sales of existing homes in the first quarter were running 6.6 percent lower than a year ago, the National Association of Realtors said Tuesday. And research firm RealtyTrac Inc. said mortgage lenders foreclosed on 62 percent more U.S. homes in April than a year ago.

Those are the kinds of national statistics behind American International Group Inc.’s disclosure last week that it took a $128 million charge in the first quarter for higher-priced, or subprime, mortgages issued by a bank it owns.

The New York-based insurer declined to specify whether the charge would refinance loans or cover foreclosure costs. The charge was related to “ongoing discussions” with the OTS about troubled mortgage loans issued by Delaware-based AIG Federal Savings Bank, said Chris Winans, an AIG spokesman.

Banking regulators “are seeking to have lenders assist certain nonprime borrowers to remain in their homes ... Our discussions have centered on that and related issues,” said Winans.

A $128 million charge subtracted from AIG’s $4 billion first-quarter profit is no big deal. However, similar charges could be significant for lenders that get most of their profit from mortgages.

The OTS is talking to other companies about these issues, said Kevin Petrasic, an OTS spokesman. He declined to detail which – or how many – companies are involved. OTS regulates lenders, including subsidiaries of two of the biggest subprime lenders: Washington Mutual Inc. and Countrywide Financial Corp.

“Each situation is really going to be evaluated on its own merits,” said Petrasic, who also declined to comment on AIG’s disclosure. “We are working with other institutions that have big subprime lending programs ... to make sure that they have a handle on their exposure” to loan defaults.

Officials at other federal banking regulatory agencies have publicly encouraged lenders to restructure troubled loans.

Part of the reason federal regulators can’t do more is because their powers are limited on many of the most-troubled loans, says Sheila Bair, chairman of the Federal Deposit Insurance Corp.

Bair cited federal data showing that lenders independent of federal authority originated more than 50 percent of subprime loans in recent years. Those loans were then often bundled into securities and sold to institutional investors.

“No single regulator has authority over a significant portion of this,” explained Bair, who has backed calls for national mortgage lending standards. “The lenders, a lot of them are completely independent of banks.”

Despite the apparent lack of federal oversight, lenders have plenty of incentive to refinance at-risk home loans, experts say.

When it comes to fixing the problem, “I don’t think it’s going to be led by the federal bank regulators,” said Paul Miller, an analyst who follows mortgage lenders for Friedman, Billings, Ramsey & Co. “It’s going to be led by the market, and people that don’t want to lose money ... it’s them just trying to be practical about the situation.”

For example, the Federal Reserve estimates that it costs a bank $50,000 to foreclose on a home, and houses sold at foreclosure auctions fetch well below appraised values.

There are signs that lenders are taking action on their own to avert a housing market crisis. Seattle-based Washington Mutual Inc. said last month it would refinance up to $2 billion in subprime mortgages to help borrowers avoid default and foreclosure.

Fannie Mae and Freddie Mac, the two biggest players in the $8 trillion mortgage market, recently committed to buy tens of billions of dollars of high-interest mortgages so that lenders can help strapped borrowers refinance and avoid foreclosure.

Still, Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, criticized federal banking regulators in March for failing to keep track as banks and other lenders loosened standards and made riskier housing loans in recent years.

Regulators, however, say they lacked authority over expanding areas of the high-risk mortgage market. A patchwork of federal and state regulatory agencies have jurisdiction in this area, putting many subprime lenders outside of stringent regulation.

In March, the Fed and the other four federal agencies that regulate banks, thrifts and credit unions proposed guidelines that call for caution when lenders make subprime mortgage loans and strict evaluations of a borrower’s ability to repay.

If formally adopted, the guidelines could result in fewer borrowers qualifying for subprime loans. Agencies are evaluating public comments on the proposals and haven’t yet set a date for a decision. The Fed plans to hold a June 14 hearing on ways to curb abusive lending practices.

Copyright © 2007 The Associated Press, Alan Zibel (AP Business Writer). All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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