Sunday, July 1, 2007

Federal banking regulators set guidelines to limit subprime mortgage lending

Federal banking regulators issued a final Statement on Subprime Mortgage Lending [PDF] on Friday, turning aside banking industry efforts to weaken them. The most important change is that financial institutions are advised that adjustable-rate mortgages should only be given to borrowers who qualify to meet the loan terms even after the rate resets higher.

“The statement describes the prudent safety and soundness and consumer protection standards that institutions should follow to ensure borrowers obtain loans they can afford to repay. These standards include a fully indexed, fully amortized qualification for borrowers and cautions on risk-layering features, including an expectation that stated income and reduced documentation should be accepted only if there are documented mitigating factors that clearly minimize the need for verification of a borrower’s repayment capacity. Consumer protection standards include clear and balanced product disclosures to customers and limits on prepayment penalties that allow for a reasonable period of time, typically at least 60 days, for customers to refinance prior to the expiration of the initial fixed interest rate period without penalty.” read more >>

The L.A. Times. “In a statement Friday, Federal Reserve Gov. Randall S. Kroszner said the guidelines were designed to ensure that borrowers could afford their mortgages after the low-cost period expired. "It's only good business sense for the lenders, and it's the right thing to do for the borrowers' sake,’ he said.”

“Members of Congress and consumer advocates have criticized U.S. bank regulators for lax oversight as problems emerged in the industry of marketing high-cost, sub-prime loans to borrowers with weak credit.”

“Nonetheless, lenders cautioned that regulatory overreaction would have a chilling effect that could make credit unavailable to deserving borrowers.”

“A representative of the mortgage-banking industry suggested Friday that regulators might have gone overboard with the latest standards. ‘This is a strong statement that will help curb abuses but will likely also constrain consumer credit choices,’ John M. Robbins, chairman of the Mortgage Bankers Assn., said in a statement.”

From Bloomberg: “‘We clearly have a profound problem,’ FDIC Chairman Sheila Bair said in an interview today. ‘It is going to get worse before it gets better, and decisive action was required,’ she added. ‘Everybody was asleep at the switch.’”

“The guidelines come too late to repair the growing crisis in subprime mortgages. The effort also didn't satisfy lawmakers, who want regulators to complement the guidelines with enforceable rules. While bank examiners can strong-arm banks with the recommendations, consumers can't file lawsuits based on them because they aren't laws.”

“Focus now turns to the Fed, which is reviewing whether there's a need to codify the standards. While central bank policy makers have preferred to rely on guidance and disclosures, Fed Governor Randall Kroszner said they will ‘seriously consider’ using its rule-making authority to prevent abuses.” read article >>

From the Housing Bubble Blog,
Will These New Standards Have Any Teeth?


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