Bies: Subprime Lenders Face More Bad News

Subprime mortgage lenders are facing a "string of bad news," including the shutdown of companies that "could not operate in a slower origination environment," according to a Federal Reserve Board governor.Susan Bies told a credit union meeting that delinquency and foreclosure rates on subprime adjustable-rate products are rising, and many industry observers are blaming "looser" underwriting standards as well as "limited or no verification of borrower income and high loan-to-value transactions." Meanwhile, the regulators are "discussing what can be done to ensure that these types of loans are being originated in a safe and sound manner," she said. (The regulators are expected to propose new underwriting guidance within the next two months.) "It is not uncommon to find margins of 600 basis points or more on adjustable-rate subprime loans after the expiration of the teaser rate," the Fed governor said. She also noted that it would be prudent for lenders to require escrow accounts on subprime loans, or at least to tell borrowers how much they should set aside for taxes and insurance.