Default Hearings Planned
The new Congress is gearing up to hold hearings on subprime lending and rising foreclosures which will put more pressure on federal regulators to tighten underwriting standards on subprime adjustable-rate products.
As the regulators consider expanding the nontraditional mortgage guidance to subprime 2/28 ARMs, they are going to have key Democrats breathing down their necks.
Senate Banking Committee chairman Chris Dodd, D-Conn., said last week that he is planning to hold hearings on subprime and predatory lending and the impact it has on minority and low-income borrowers.
"For these consumers, the American dream can truly become a nightmare," Sen. Dodd said at an annual Rainbow PUSH/Wall Street Project summit hosted by the Rev. Jesse Jackson and business leaders.
Sen. Dodd said too many subprime borrowers end up paying "unnecessarily high rates and fees and hidden backend costs. In the worst instances, homebuyers are slowly robbed of their homes' equity until they, and their families, end up in default and foreclosure." He did not announce a timetable for the hearings.
In the House of Representatives, the new chairwoman of the housing subcommittee is concerned that subprime lending is responsible for rising foreclosure rates and she is planning to hold hearings.
"Foreclosures are on the rise and most evidence points to predatory and subprime lending as a major cause," Rep. Maxine Waters, D-Calif., told a Women in Housing and Finance luncheon last week.
Rep. Waters is the third-ranking Democrat on the House Financial Services Committee. Meanwhile, federal banking regulators are beginning to talk about their efforts to address concerns about subprime lending, particularly subprime 2/28 adjustable-rate mortgages.
Sen. Dodd along with five other senators recently urged the regulators to expand the nontraditional mortgage guidance to include 2/28 ARMs, which has stirred industry opposition. And the regulators are planning to respond by issuing new interagency guidance on subprime 2/28 adjustable-rate mortgages for public comment.
The regulators are "discussing what can be done to ensure that these types of loans are being originated in a safe and sound manner," Federal Reserve governor Susan Bies told a credit union group last week.
She noted that subprime lenders are facing a "string of bad news," including the shutdown of companies that "could not operate in a slower origination environment."
But she also noted that subprime delinquency and foreclosure rates are rising and many industry observers are blaming "looser" underwriting standards, as well as "limited or no verification of borrowers' income and high loan-to-value transactions." Federal Deposit Insurance Corp. officials want to issue proposed guidance for industry comments in the next two months. "FDIC chairman Sheila Bair believes all products should be underwritten at the fully indexed rate with clear consumer disclosures," an FDIC spokesman said. But the FDIC may be ahead of the other regulators.
"It is an area of concern," according to Office of the Comptroller of the Currency spokesman Robert Garsson. "We need to look at it and we will. But we are not going to act precipitously." The regulators are considering a revision of the NTM guidance to include 2/28 ARMs along with other options, expanding the regulator's existing subprime guidance or simply issuing a new advisory.
An FDIC official noted that the NTM guidance is narrow in scope and directed at interest-only and payment-option ARMs, which are generally prime and alt-A mortgage products. But 2/28 and 3/27 ARMs are mostly subprime products.
However, Sen. Dodd's Dec. 7 letter explains that subprime borrowers can see their interest rate jump from 8% to 12% when the initial fixed-rate period expires after two years, which is similar to the payment shock IO and option-ARM borrowers face. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com