At today's "toxic mortgage" Senate hearings: "Our national economy is at significant risk if these loans fail in great numbers, as I fear they will"

Classic bubble behavior is when credit is finally tightened. The Fed did a good job of that (after keeping the faucet running wayyyy to long), but now the Senate might get involved too, regulating "toxic mortgages" and limiting the use of option arm, no down, no doc, teaser rate, interest only garbage loans.

Here's highlights from today's hearings. Sounds better than last week's backslapping NAR CYA-fest on the housing bubble.

Exotic mortgages sow confusion, senators told - Regulators to issue stricter guidelines to lenders soon

Homeowners don't fully understand the risks associated with taking on alternative mortgages that allow interest-only payments or negative amortization, federal officials told senators Wednesday.

At a hearing on so-called exotic mortgages before the Senate Banking Committee, U.S. banking regulators promised they would soon release guidance to lenders that would require greater disclosures to be made borrowers and recommend tighter credit standards for such loans.

In some cases, monthly payments could double or triple once the low "teaser rate" expires and payments are reset to cover the growing principal on the loan, said Sandra Thompson, acting director of supervision and consumer protection at the Federal Deposit Insurance Corp.

"The acceleration of the U.S. home price boom does appear to have been related to changes in the mortgage markets," Thompson said. "The greater availability of flexible mortgage structures probably allowed prices increased to outstrip growth in incomes to a greater extent that would otherwise have been the case.

"In addition, high-priced homes probably induced at least some borrowers to use interest-only or payment-option mortgages in order to afford their home," she testified.

"Our national economy is at significant risk if these loans fail in great numbers, as I fear they will," he said.