Federal Mortgage Reform Unlikely in 2007

Citing Dodd's summit, Mark Adelson, an analyst with Nomura Securities in New York, warns that the housing market would be hurt if some banks overzealously arrange loan workouts.

"Lending money is not about being nice," Adelson said. "It's a business."

Hedge funds have asked a trade group that regulates their industry to deny a Bear Stearns Cos. proposal regarding banks' legal responsibilities if they arrange a workout on a loan that also has a default-risk contract attached.

Hedge funds negotiated billions of dollars worth of such default-risk contracts with banks on mortgages the banks issued the past few years. The hedge funds were in effect underwriting some of the risk the banks had taken on to issue mortgages to borrowers with risky credit.

In many cases, banks now owe the hedge funds much more money under the terms of those contracts than the financial hit they take when they help bail out a troubled loan, according to the letters that were sent by more than 25 hedge funds.

Michael Waldorf, a senior vice president at hedge fund Paulson & Co., one of the companies that signed the letter, insists his firm's concerns "have nothing to do with helping borrowers ... our concerns are about market manipulation by institutions."

In an e-mail, a Bear Stearns spokesman suggested that some hedge funds are disappointed that big bets they made on a subprime mortgage meltdown aren't paying off.

He denied that Bear Stearns decides to modify the terms of distressed loans based on "any activity or outstanding positions" in default-risk contracts.

Federal lawmakers and regulators say they are balancing how to make sure high-risk borrowers can still get loans against efforts to rein in abusive lending practices.

"We will try to make sure that we don't inadvertently regulate subprime lending to death," said Rep. Brad Miller, a North Carolina Democrat and longtime proponent of predatory lending legislation.