A Growing Chorus On Risky Mortgages
Agencies Seek to Curtail Subprime Home Loans
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.