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By Robert Schroeder, MarketWatch

RISMEDIA, May 24, 2007-(MarketWatch)-The chief of the Mortgage Bankers Association defended the use of subprime loans Tuesday, saying they’ve enabled millions of Americans to buy homes and urging that a fix for that sector of the market not end up hobbling the entire mortgage industry.

At the same time, MBA Chairman John Robbins acknowledged that “unethical actors” in the mortgage industry have hurt borrowers and damaged bankers’ reputations.

Subprime delinquencies have jumped in the U.S. as interest rates have climbed and house prices stopped rising. Subprime loans are usually extended to those borrowers with blemished credit records.

But Robbins, in a speech at the National Press Club, said subprime loans remain “an extremely important tool for providing homeownership opportunities in this country.”

“We must find a way to prevent future abuse without eliminating subprime loans,” Robbins said in a prepared text.

“I want you all to remember that three million Americans used a subprime loan to purchase a house,” he said.

Robbins also said regulators should be careful not to damage what he called a “subtle, intricate and ingenious” mortgage-finance system by trying to fix problems in the subprime market.

His speech followed on a joint statement released Monday by the MBA and other banking and financial-services trade groups that urged federal regulators to establish a uniform standard for both banks and non-banks that make subprime loans. Neither recently proposed federal subprime-loan guidance nor nontraditional mortgage guidance applies to non-bank lenders.

Robbins also said the impact of problems in the subprime market will be limited, echoing comments that Federal Reserve Chairman Ben Bernanke made last week.

Bernanke said that he believes the effect of troubles in the subprime market “will likely be limited” and that the central bank doesn’t expect subprime problems to spill over significantly into the rest of the economy or the U.S. financial system.

Robbins noted that only 5.1% of homeowners are subprime borrowers with adjustable-rate mortgages. Ultimately, he said, only one quarter of one percent of subprime ARM borrowers are facing foreclosure.

Still, Robbins said, the industry is trying to help troubled subprime borrowers by quickly contacting those in distress and by setting up a free counseling hotline. He said his group is also setting up foreclosure “intervention programs” in cities with high rates of foreclosures.

He urged borrowers to contact their loan-servicer “if [they] even think that there is a chance” of running into some financial hardship. The faster borrowers reach out, the faster bankers can set up loan modification programs and other services to help out, he said.

Robbins also said there should be a national standard for mortgage brokers, not a state-by-state system. Such a standard would lay out rules for lending on a national basis, he said. It would also put in place a minimum competency test for brokers, Robbins said.

Robbins also prodded Congress to create a financial literacy requirement for public schools. “Isn’t financial literacy a little more important than wood shop?” he asked.

Robert Schroeder is a reporter for MarketWatch in Washington.

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