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Regulators Ask for Comment on Guidelines Covering Wider Class of Subprime Mortgages

BNA
March 5, 2007

Federal bank, thrift, and credit union regulators March 2 asked for comment on a new set of guidelines for adjustable-rate subprime mortgage products, especially loans that borrowers cannot repay without refinancing or selling their homes.

The proposed guidance would direct lenders to more closely consider whether borrowers could repay such loans, to ask them for more documentation, and to provide more information in advertising about the risks of adjustable-rate mortgages.

The proposed guidance, which regulators said will complement a separate set of guidelines on nontraditional mortgages issued in September, (190 DER 42, 10/2/06 ) garnered quick praise from Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and House Financial Services Committee Chairman Barney Frank (D-Mass.).

Both have called for a new set of guidelines to cover subprime adjustable-rate mortgages (ARMs), and said the proposal is an important step.

"Today, we got the right answer," Dodd said March 2, saying some loans can threaten institutions and consumers and voicing worries about "looming foreclosure problems that may lie ahead."

In a March 2 statement, Frank said he and others on his panel are "concerned about risky loans" and their impact on consumers and financial institutions.

"I applaud the work of the regulators in issuing this important draft guidance today, and I look forward to reviewing the proposal," Frank said, singling out for special mention efforts by Federal Deposit Insurance Corporation Chair Sheila Bair.

Banking Groups Wary

However, the proposal received mixed reactions from trade groups. James Valentine, director of housing and community development for the American Bankers Association, said the guidance does not address the many unregulated loan originators that make up so much of the market for mortgage loans.

Lenders covered by the guidance comprise only about 25 percent to 30 percent of the mortgage industry, he said.

"There seems to be a sincere effort on behalf of the regulators to want to take the mystery out of the mortgage shopping process. This gets you only part of the way there," Valentine told BNA March 2.

The proposal was issued by the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration.

Comments are due 60 days following publication of the proposal in the Federal Register.

Lenders Must Highlight Risks for Borrowers

In the proposal, regulators said consumers may not appreciate the implications of some subprime mortgage loans, especially those with shifting rate and payment characteristics.

"The Agencies are concerned that subprime borrowers may not fully understand the risks and consequences of obtaining certain adjustable-rate mortgage (ARM) products," the proposal said.

In general, the proposed guidance said lenders should:

consider whether borrowers can repay a loan based on the fully indexed rate, assuming fully amortized payment schedule, instead of qualifying borrowers simply on the basis of a low "teaser" rate;

ask for more documentation (instead of higher interest payments) if a borrower's financial position is unclear;

provide, in marketing and advertising materials, "clear and balanced information about the relative benefits and risks of the products," including the risk of "payment shock," and;

establish strong training programs and internal controls to ensure that practices and procedures are being monitored.

Nor are all the worries about borrowers. The proposed guidelines also said some loans "may pose an elevated credit risk" to lenders.

The Right Framework, Some Say

Robert Davis, executive vice president and head of government relations at America's Community Bankers, was generally supportive of the proposed guidelines.

"I think this is the right framework for the regulators to use as they think about these lending issues," Davis said. He noted that ACB will discuss the proposal with its members to identify any possible "unintended consequences" that could result.

Davis said ACB agrees with the principle articulated in the proposal that mortgages should be offered with the expectation that consumers will have the ability to repay. He added that "we are pleased to see that the guidance is not prescriptive as to the kinds of credit instruments" that lenders can make available.

Subprime Loans in Capitol Hill Spotlight

The proposed guidelines cover a class of loans not explicitly covered in the September 2006 guidelines.

Although members of Congress and consumer advocates have called for wider application of the guidelines, the issue came sharply into focus Feb. 14 and 15, when Federal Reserve Board Chairman Ben S. Bernanke fielded numerous questions while testifying before Dodd's committee and Frank's panel.

Bernanke said then that regulators would be issuing a broader statement clarifying that the same principles at work in the September 2006 guidelines would also apply to subprime ARMS such as 2/28 loans and 3/27 mortgages (32 DER A-31, 02/16/07 ).

CSBS Calls for Partnership with States

Trade associations weighed in quickly on the potential impact of the proposed guidelines.

Some, like the Mortgage Bankers Association, worried that by targeting so-called 2/28 loans and other hybrid ARMs with low initial fixed rates that later reset on a permanent basis, adoption of the guidelines may give borrowers fewer options.

"We are concerned that the proposed statement, if adopted as proposed, may restrict credit to many consumers in high-cost areas and deny credit to many deserving low-income, minority, and first-time homebuyers," MBA Chairman John M. Robbins said in a March 2 statement.

Housing Policy Council President John Dalton expressed similar concerns in a March 2 statement, calling for implementation of the guidelines "in a careful, flexible manner that does not inadvertently cause consumers to be denied credit."

State Officials Supportive

However, the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators issued a joint statement voicing "strong endorsement" of the proposal.

They also said they plan to develop a parallel proposal for state regulators to use with state-supervised lenders, and said more coordination between regulators is needed.

"CSBS and AARMR believe a coordinated effort among federal and state regulatory agencies is necessary to provide effective supervision of the residential mortgage industry," the two groups said March 2.

More support came from Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.

"Soaring delinquencies and defaults in the subprime market have put millions of borrowers at risk of losing their homes," he said March 2.

Lenders Take Beating in Subprime Fallout

The Associated Press

Monday, March 5, 2007

NEW YORK -- Mounting concerns on Wall Street that mortgage lenders might be hurt by increasing defaults and delinquencies sent investors fleeing Monday from some of the biggest names in the industry.

The meltdown among lenders that specialize in home loans to people with weak credit, known in the industry as subprime lenders, again ravaged stock prices. Financial institutions from Britain's HSBC Holdings PLC to subprime leader Countrywide Financial Corp. sank amid reports of strained portfolios as loans went bad.

The latest to rattle the markets was New Century Financial Corp., the nation's second-largest subprime lender. The Irvine, Calif.-based company disclosed a criminal probe into the trading of its securities, and into the lender's accounting procedures.

Already beleaguered investors were swift to react. New Century's shares lost 60 percent on Monday _ wiping $532 million from its market value. Wall Street, still wobbly after last week's huge plunge, also punished the rest of an industry blamed for loosening their lending standards amid an eroding housing market.

"We see increasing evidence that this industry is now in a downward spiral whereby each negative development fuels additional deterioration in key fundamentals including origination volume, pricing, credit and most importantly funding," Stifel Nicolaus analyst Christopher Brendler said.

The troubles at New Century had been mounting since February, when it announced that it lost track of how severely the loans in its portfolio were losing value. The company on Friday disclosed it is being investigated the Securities and Exchange Commission and the U.S. Attorney for the Central District of California on its accounting methods and the trading of its securities ahead of a Feb. 7 earnings restatement announcement.

Investors who buy the company's mortgage loans in the secondary market have been selling the loans back when borrowers default, New Century said. The company said that because of accounting errors, it underestimated how many loans would be resold and how much value those loans would lose before ending up back in New Century's portfolio.

Concerns of a meltdown at New Century include the possibility it will not be able to meet covenants with major financial backers, the company said. Subprime lenders enter into agreements with big banks to finance their operations. These backers require subprime lenders meet minimum financial targets, or face breaching loan agreements that would force banks to pull out of the deals.

This dragged down shares of some of the top U.S. banks and investment banks.

Morgan Stanley Inc., which had a 5.5 percent stake in New Century as of Dec. 31, dropped $1.33, or 2 percent, to $72.03. State Street Corp., with a 3.8 percent stake, shed 12 cents to $64.96. Citigroup Inc., with 3.5 percent stake, traded as low as $49.56 before recovering to post a 27-cent gain, at $50.24.

Other subprime lenders also tumbled. Countrywide Financial fell $1.03, or 2.8 percent, to $35.99, and is down about 14 percent since January. Novastar Financial Inc. shares plunged $2.17, or 30 percent, to $5.07, and are down about 40 percent this year.

Higher U.S. interest rates and a stagnant housing market began to take their toll on borrowers who had been relying on the rising value of real-estate markets to help them refinance their mortgages.

Last year, 13.5 percent of mortgages originated in the U.S. were subprime, according to the Mortgage Bankers Association. This is up from

2.6 percent in 2000. The subprime market accounted for about 20 percent, or $600 billion, of the $3 trillion mortgage market.

The New Century case is of particular concern because of fears that trouble in the subprime business could spread to prime mortgages, causing pain for many more lenders. Leading those concerns was HSBC, Europe's largest bank with significant operations in the U.S., which warned in February its profits would be weaker because of subprime lending.

The world's third-largest bank on Monday reported its highest annual profit of $15.79 billion for 2006. Bad-debt charges jumped 36 percent to $10.57 billion, roughly in line with expectations.

Chief Executive Michael Geoghegan attempted to fend off criticism that the bank had provided loans in the United States to people who were not in a position to pay their debts.

"This is not trailer park lending," Geoghegan said, adding that the typical HSBC Finance customer has average household income of $83,000, is 41 years old, has two children and a home worth $190,000. "This is Main Street America."

Concern about subprime exposure also has spilled into major U.S. investment houses. Standard & Poor's on Monday downgraded Lehman Brothers Holdings Inc. and Merrill Lynch & Co., partly on subprime mortgage woes. S&P noted that subprime loans are a small piece of the company's overall assets, but was still concerned about recent market trends.

Merrill Lynch fell 73 cents to $81.34, and Lehman rose 9 cents to $72.19.

A Growing Chorus On Risky Mortgages

Agencies Seek to Curtail Subprime Home Loans

Washington Post

Saturday, March 3, 2007

Federal banking regulators yesterday called on lenders to tighten their standards for issuing nontraditional home loans.

The guidelines, proposed by the Federal Reserve and four other federal regulatory agencies, address loans known as "subprime" mortgages that cater to borrowers with blemished credit histories or low incomes. Such mortgages became popular during the housing boom that began to wane in 2005, allowing people who would otherwise not have qualified for conventional loans to buy homes. However, concern has grown that rising delinquency rates on such mortgages threaten both lenders and borrowers.

Lenders should better evaluate a borrower's ability to repay the loan and also should more clearly explain the risks of such mortgages, the agencies said in proposing what is called a guidance, a serious regulatory move. They particularly focused on adjustable-rate loans with "teaser" rates that are low for the first two or three years then increase dramatically, in some cases doubling a monthly payment.

When deciding whether borrowers qualify for a 2-28 or 3-27 adjustable-rate mortgage, as they are known, lenders have been evaluating their ability to repay the loan at the introductory rate. The proposal would require that only borrowers who can afford the higher rate be approved for such loans.

"What we're really worried about is the marketing of products with payment shock to subprime borrowers, which is a vulnerable market," said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., one of the regulatory agencies proposing the guidelines.

The subprime mortgage industry is already in turmoil. This week, Freddie Mac, one of the biggest mortgage investors, said it would stop buying some high-risk loans.

This is not the first time the federal agencies have tightened controls on nontraditional mortgages. In September, they issued a similar set of guidelines to lenders over such loans as interest-only mortgages.

But consumer advocates and some lawmakers complained that they did not go far enough in addressing adjustable-rate, subprime mortgages.

"We began to look at those products, and we agreed there were some similar issues both about disclosures and adequate underwriting capacity," said Comptroller of the Currency John C. Dugan.

Consumer advocates said the guidelines, which now face a 60-day comment period, address those issues. "I think it's important to send the message that this kind of underwriting isn't appropriate and shouldn't go forward in the future," said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America.

But lenders warned that the new requirements would make buying a home more difficult for low-income, minority and first-time buyers. Subprime mortgages made up about one-fifth of all new mortgages last year, according to the Mortgage Bankers Association. "These are extremely valuable products to some consumers," said Steve O'Connor, senior vice president of public policy for that association.

Mortgage Crisis Spirals, and Casualties Mount

NY Times

March 5, 2007

Even in affluent Orange County, Calif., the growing wealth of executives and brokers in the booming mortgage industry was hard to miss.

For Kal Elsayed, a former executive at New Century Financial, a large lender based in Irvine, driving a red convertible Ferrari to work at a company that provided home loans to people with low incomes and weak credit might have appeared ostentatious, he now acknowledges. But, he says, that was nothing compared with the private jets that executives at other companies had.

“You just lost touch with reality after a while because that’s just how people were living,” said Mr. Elsayed, 42, who spent nine years at New Century before leaving to start his own mortgage firm in 2005. “We made so much money you couldn’t believe it. And you didn’t have to do anything. You just had to show up.”

Just as the technology boom of the late 1990s turned twenty-something programmers into dot-com billionaires, and leveraged buyouts a decade earlier turned Wall Street bankers into Masters of the Universe, the explosive growth in subprime lending turned mortgage bankers and brokers into multimillionaires seemingly overnight.

Now an escalating crisis in the market, which seemed to reach a new crescendo late last week, is threatening a wide band of people. Foremost are the poor and minority homeowners who used easy credit to buy houses that are turning out to be too expensive for them now that mortgage rates are going up, but the pain is also being felt widely throughout the business world.

Large companies that bought subprime lenders during the boom, like H&R Block and HSBC, are now scrambling to sell them or scale back their exposure. Many investors are also likely to suffer: Wall Street firms made billions in fees, commissions and trading revenue from packaging and selling subprime mortgages to them as bonds.

New Century has emerged as a poster child for the lenders that rode that boom to the top and are now in free fall. The company disclosed on Friday that federal prosecutors and securities regulators were investigating stock sales and accounting errors. The latter could jeopardize billions of dollars in financing for the company, which issued $39.4 billion in subprime loans in the first nine months of last year.

Weakening home prices and rising default rates have rocked the subprime business. But for those who cashed out before the market turned, the ride up was particularly sweet. The three founders of New Century, for example, together made more than $40.5 million in profits from selling shares in the company from 2004 to 2006, according to an analysis by Thomson Financial. They collected millions of dollars more in dividends, salaries, bonuses and perks.

The company said in a statement yesterday that the founders were “still significant shareholders,” noting that they collectively owned about 7 percent of the company at the end of last year.

New Century’s stock price, which seemed to mirror the trajectory of the subprime business, peaked at nearly $66 a share in December of 2004 and traded in the $40s most of last year; on Friday, it was trading at $11 a share after the market closed. In a series of sales from August to November, two of the company’s founders sold shares for an average price of about $40 a share, for a total profit of $21.4 million.

It is not known whether the stock sales by the founders are among the sales being examined by federal investigators. Some of them had been part of scheduled stock sales that are often used by executives to diversify their portfolios. But some of the sales occurred on the same day that the executives entered the plans. A New Century spokeswoman, Laura Oberhelman, said that executives declined further comment.

The founders’ stock also rose in the social circles of southern California, the epicenter of the boom in subprime. Five of the 10 biggest providers of subprime mortgages last year had their headquarters in the region.

Robert K. Cole, 60, a co-founder who retired as chairman and chief executive last year, lives in a 6,100-square-foot oceanfront home in Laguna Beach that is valued at tens of millions of dollars and was once owned by the chief executive of Pimco Advisors, the giant bond trading and management firm. Edward F. Gotschall, 52, another co-founder who is vice chairman of the board, donated $3 million for an expanded trauma center at Mission Hospital that will be named for him and his wife Susan.

The executives from New Century are by no means alone in cashing in on the bonanza, and they do not appear to have scored the biggest profits. That title may be claimed by Angelo R. Mozilo, the chief executive of Countrywide Financial, the nation’s largest stand-alone mortgage company and one of the largest subprime lenders last year. He reaped more than $270 million in profits from sales of stock and the exercise of stock options from 2004 to the start of this year, according to the Thompson analysis.

Of course, most of the 500,000 people who work in the mortgage industry did not cash in so grandly. The wealth was concentrated among executives, loan officers and brokers, because the greatest rewards were meted out in the form of commissions, bonuses and stock awards.

“In the hot times, it was not unusual to see a broker make a million bucks,” said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. “You can carry that up further to people who ran the companies. The whole business revolves around personal compensation.”

The hot times are clearly over.

New Century’s disclosure of the federal investigations on Friday was the most serious in a string of shocks to have rocked the industry in the last three months.

A handful of lenders have sought bankruptcy protection, several have been acquired and a few have been shut down. Also on Friday, Fremont General, a top-five lender, said it planned to leave the business.

Industry officials say they are seeing an exodus of executives and salespeople as companies fold, cut jobs and push out early leaders.

“Everyone has run for the hills,” said William D. Dallas, whose company, Ownit Mortgage, filed for bankruptcy protection in December after it lost financing from Merrill Lynch and other banks.

For the borrowers of these mortgages, it may become more difficult to refinance if lending standards are tightened significantly. Many are already facing the prospect of payment shock when low, fixed-interest mortgage rates adjust to higher, variable rates.

On Wall Street, big investment banks could lose a significant source of revenue if the appetite for bonds backed by mortgages dries up.

In the last two years many skeptics began warning that the red-hot housing market and adjustable-rate loans would blend into a toxic brew. Last year, subprime loans totaled $600 billion, or about 20 percent of all mortgages, up from $120 billion and 5 percent in 2001, according to Inside Mortgage Finance. More than half of subprime loans have adjustable rates.

Many of the problems that have surfaced thus far are not tied to the resetting of rates. Rather, they stem from a sharp and early spike in the default rates among loans issued last year.

For example, about 13.8 percent of the loans in a group of mortgages New Century sold to investors in April were behind in payments or in foreclosure by January. By comparison, only 6 percent of loans in a pool sold to investors in March 2005 had met that same fate by January 2006.

Investors and regulators fear that the problems will only worsen as so many borrowers have fallen behind so quickly, especially at a time when the overall economy is healthy. The phenomenon suggests that lending standards were significantly weakened last year and that lenders were not as watchful for fraudulent transactions.

For New Century, the early payment defaults pose significant financial problems. In the first nine months of last year, Wall Street banks and investors that it does business with forced it to buy back $469 million in loans it had sold to them, up from $240 million for the same period in 2005.

The company was able to sell back about half of those loans at a discount of 26.5 percent. How it handled the remainder — about $227 million — is now under scrutiny. According to accounting rules the company should have valued the loans on its books for what they were worth today, not their previous face value. But it did not.

If it had, the company would have seen its earnings fall by about $60 million before taxes, wiping out most of its profit in the third quarter, according to Zach Gast, an analyst at the Center for Financial Research and Analysis, a forensic accounting firm.

This is important, because the company’s financing agreements require that it not lose money for any rolling six-month period. On Friday, New Century said it did not expect to make a profit in the six months that ended in December and that it was negotiating with lenders to waive the requirement but has only secured six of 11 waivers it needs.

“They had losses sitting on their balance sheets,” Mr. Gast said.

In August, the company’s chief financial officer, Patti M. Dodge, announced she was stepping down from her post to oversee investor relations, a department that typically reports to the chief financial officer. Taj S. Bindra, a former executive at Washington Mutual, replaced her in November.

For the second time in a decade, New Century finds itself fighting to survive. The firm’s roots were planted at Plaza Home Mortgage Bank where the three founders of New Century — Mr. Cole, a longtime mortgage executive; Mr. Gotschall; and a lawyer named Bradley A. Morrice — worked together. The three formed New Century in 1995 after Plaza was sold to Fleet Mortgage Group, now a part of Washington Mutual.

In the late 1990s, New Century narrowly survived accounting concerns and a scare in the bond market after Russia’ s default in 1998. It pulled through thanks to an investment by U.S. Bancorp, a bank based in Minneapolis.

With interest rates at historic lows, it quickly grabbed a big share of the fast-growing subprime market during the housing boom.

“They walked into a niche industry at a time when everything was lining up perfectly for what they did,” said W. Scott Simon, a managing director at Pimco Advisors. “In 2001, 2002 and 2003 the subprime business was just phenomenally profitable. Home prices kept appreciating and it seemed that no loans ever went bad.”

Subprime-lending Guidelines Expected As Early As Friday

1 March 2007

Dow Jones Business News

WASHINGTON (Dow Jones) -- Banking regulators may release guidelines about subprime loans as soon as Friday, according to a person familiar with the matter, in a move designed to address growing concerns about that segment of the mortgage market.

Companies that specialize in these types of loans -- which are offered to borrowers who fail to meet the strictest lending standards -- have suffered as housing prices stopped rising and interest rates climbed from record lows.

Details of the guidance weren't available from regulators late Thursday.

But observers believe regulators will tighten standards for such loans.

"I've heard the guidance will focus on underwriting based on the fully indexed rate on subprime loans," said Zack Gast, a financial-services analyst at the Center for Financial Research & Analysis. Such a move would mean that lenders won't be able to select borrowers based on certain rates.

"The effect of that would be to make demand for subprime mortgages lower. Fewer people would be able to buy these mortgages," Gast said.

Regulators are concerned that loosening of underwriting standards last year may have left some homeowners with mortgages they can't afford.

Earlier this week, big mortgage-buyer Freddie Mac said it would stop buying those loans that have "a high likelihood of excessive payment shock and possible foreclosure."

Instead, the company plans to buy only subprime adjustable-rate mortgages, and securities backed by such loans, that have been qualified at the fully indexed and fully amortizing rate.

LoanPerformance Predictive Tool Targets Mortgage Firms

American Banker

Friday, March 2, 2007

Mortgage lenders increasingly are using technology to weed out or "scrub" loans that get sold in the secondary market.

A new product from LoanPerformance, an analytics and mortgage data unit of First American Corp. of Santa Ana, Calif., is one of the tools they are using to gauge a borrower's likelihood to prepay a mortgage in the short term.

Richard Harmon, the head of LoanPerformance's customer intelligence group, said the company wanted to create a simple technology that would allow mortgage lenders to take a list of borrower names and addresses and, without using Fico scores, determine whether a borrower had a propensity either to move, to refinance, or to pay off a mortgage.

Prepayment risk is a major factor in valuing mortgage securities and servicing portfolios, particularly as interest rates rise, he said.

PreTell, which LoanPerformance announced Feb. 20, analyzes borrowers' payment records and uses First American's property records and household demographic data to score 22 different mortgage products, from 30-year fixed-rate loans to subprime loans, Mr. Harmon said. After sifting through 900 pieces of data, it produces a score ranging from 1 to 1,000 that can be used to predict a borrower's likelihood of prepaying a mortgage, he said.

New Century Financial Corp., in Irvine, Calif., began testing PreTell in late 2006 to find out if there was a correlation between loan quality and the performance of loans sold to the secondary market.

David Hurt, a senior vice president of business development at LoanPerformance, said in an interview Thursday that both whole-loan sellers and buyers could use the PreTell scores to assess the risk of loan pools.

"The relative duration of payments could be extremely meaningful to their P&L in deciding which loans they want to keep in their portfolio, or put in their servicing portfolio," Mr. Hurt said. "It's something that they could arbitrage."

LoanPerformance has been marketing the product largely as a customer retention tool. Mr. Hurt said the servicing industry spends millions marketing to customers "but their campaigns are so broad-based that they don't deliver meaningful returns for the kind of money they're spending."

"Instead of doing mass mailings using huge customer lists, the idea is that servicing companies can reduce their mailing volume significantly, because now they're targeting borrowers who have a propensity to sell and need another mortgage product," he said.

Mr. Harmon said PreTell does not use credit data "in any way"; it allows institutions to make offers to customers without doing a costly credit analysis beforehand. Some companies also have been limiting their use of credit data in identifying risk because they want to avoid fair-lending requirements, he said.

Charles Stone, a vice president of customer initiatives at General Motors Corp.'s GMAC Mortgage, said that in a test PreTell saved GMAC $100,000 in mailing costs in the first half of 2006 by affording "better visibility into our servicing portfolio."

Countrywide Delinquencies Rise

Wall Street Journal

March 2, 2007

Countrywide Financial Corp., the largest U.S. home mortgage lender, reported sharp increases in late payments, including loans by borrowers with relatively strong credit records.

In a Securities and Exchange Commission filing, the Calabasas, Calif., lender said payments were at least 30 days late at the end of 2006 on 2.9% of prime home-equity loans serviced by the company, up from 1.6% a year earlier and 0.8% at the end of 2004. Countrywide said payments were late on 19% of subprime mortgage loans, up from 15.2% at the end of 2005 and 11.3% at the end of 2004. Subprime loans are for borrowers with weak credit records. A loan servicer collects payments.

The new data come amid growing anxiety about a surge in late payments on subprime loans, which accounted for about a fifth of all new home mortgages granted last year. While prime loans are performing much better and the vast majority of Americans are keeping up on payments, some analysts fret the damage is starting to creep up the credit spectrum and won't be confined to subprime borrowers.

The Federal Reserve and other bank regulators are expected to release proposed guidance as early as today to subprime lenders. According to one person familiar with the guidance, it may require lenders to ensure that subprime borrowers can afford to meet the higher payments that kick in after the first "reset" from the initial low rate that typically applies for the first two or three years.

The Mortgage Bankers Association, a trade group in Washington, opposes the idea of forcing lenders to determine whether the borrower can afford the potential cost of the loan after two or three years. "We think you're going to knock a lot of borrowers out of the market," said Steve O'Connor, senior vice president, public policy, at the association.

New data from First American LoanPerformance, a research firm in San Francisco, also show a generally rising trend in delinquent payments. The firm said payments were at least 60 days late in December on about 14% of subprime loans packaged into mortgage securities, up from 8.3% a year earlier. For Alt-A loans, a category that falls between prime and subprime, the rate increased to 2.4% from 1.2%.

Meanwhile, IndyMac Bancorp Inc., Pasadena, Calif., another large mortgage lender that is a big player in Alt-A loans, said earnings this year probably will fall from the 2006 level partly because of a squeeze on profit margins. For 2006, IndyMac previously reported record net income of $343 million, or $4.82 a share.