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White House Unveils Plan to Overhaul Credit Rules

The Bush administration explained Thursday how it would like to overhaul Washington's vast regulatory system to prevent another crisis in the nation's credit markets. It said banks, mortgage companies, investors and credit-rating agencies all share in the blame for creating the crisis.

It also proposed that mortgage brokers be licensed and added some new voluntary guidelines to address the problem.

The report was prepared by the president's working group on the financial markets, which includes all of the major regulatory agencies.

Treasury Secretary Henry Paulson said a big surge in mortgage delinquencies — and the spread of enormously complex new debt products — has hurt the markets, and has exacerbated and uncovered other weaknesses in the system. Paulson said the group wants to find ways to contain the problem — without going too far.

"The objective here is to get the balance right. Regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems," he said.

The group proposed new licensing standards for mortgage brokers. It also said mortgage lenders need to be required to spell out for borrowers exactly how much their mortgages will cost over time. That way, fewer homeowners will find themselves saddled with monthly payments that suddenly adjust to levels they didn't expect and can't afford.

"This is a very good ... late attempt at trying to fix the problems. ... They're doing a lot to return some confidence to the market," said Anthony Sanders, a professor of finance at Arizona State University.

But Joseph Mason, associate professor of finance at Drexel University, was more critical about the report, saying, "It doesn't go far enough and is too vague to be of any help."

For instance, the report said some effort needs to be made to ensure that banks do a better job of assessing risks. That way, companies like Citigroup will be less likely to become immersed in bad mortgage debt the way they are now.

And the report said the credit-rating agencies that decide whether these risky securities are safe to buy need to be much more transparent about the way they work.

But the report seemed to suggest that this be done voluntarily and not be legislated by Congress.

"They fall back on 'Well, if they make disclosures clearer somehow that's going to help people' and in fact this system is so broken that we need much stronger laws," said Ira Rheingold, who heads the National Association of Consumer Advocates.

Rheingold said it's frustrating that the Bush administration took so long to acknowledge the mortgage crisis. But Rheingold also said the administration was gradually becoming less doctrinaire about its free-market principles.

"The fact that they're offering proposals, that says that the government actually has a role here and that the government needs to step in and regulate a marketplace that has failed is a big move for this administration," he said.

Just as the report was coming out Thursday, there was another vivid illustration of how much damage the mortgage crisis is doing: The big U.S. buyout firm the Carlyle Group said one of its affiliated investment funds had defaulted on more than $16 billion in debt. The fund had suffered huge losses in the subprime mortgage fiasco, and efforts to renegotiate its debts had failed. The announcement of the default sent stocks tumbling, although they recovered later in the day.

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Jim Zarroli is an NPR correspondent based in New York. He covers economics and business news.