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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.