Mortgage lending industry responds to sub-prime distress callJim Van Lawdelinquencies, foreclosure, intervention, federal banking regulators With escalating defaults and foreclosures in the nation's sub-prime mortgage market threatening to drive down home values and weaken the economy, solutions are starting to emerge from both the public and private sectors. Here is an overview of some of these initiatives. Responsible sub-prime mortgage lending has made the dream of homeownership a reality for millions of Americans. However, in recent years, some mortgage lenders--motivated by soaring real estate values and a record housing market--began taking greater risks and relaxing their credit criteria. As a result, sub-prime loans grew from nine percent of all mortgage originations in 2004 to 21 percent in 2006. Unfortunately, so did delinquencies, reaching an all-time high in the first quarter of 2007 with 15 percent of all sub-prime mortgages 30 days or more past due. Interest rates on an estimated $265 billion in sub-prime mortgages are scheduled to reset upward to as much as 12 percent this year. Without immediate intervention, the sub-prime crisis is certain to escalate. Fortunately, help is on the way from a number of residential mortgage sectors. The Mortgage Bankers Association recently issued a joint statement, along with five other financial services trade groups, outlining a shared commitment to strengthening sub-prime lending standards. The statement called on lenders to embrace responsible sub-prime lending principles and pushed for federal banking regulators to strengthen underwriting standards and protect borrowers against unfair and deceptive mortgage lending practices. In late June, five of the nation's leading financial regulatory agencies (Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency and the Office of Thrift Supervision) issued a final statement on sub-prime mortgage lending that "describes the prudent safety, 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, the use of clear and balanced product disclosures to customers and limits on pre-payment 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. Government-sponsored Freddie Mac has announced tougher sub-prime lending standards aimed at reducing the risk of future borrower default. The program includes only buying sub-prime adjustable-rate mortgages that qualify borrowers at the fully-indexed and fully-amortizing rate, limiting the use of low-documentation underwriting and urging mortgage lenders to collect escrow accounts for borrowers' taxes and insurance payments. Several non-profit groups are also stepping forward to provide assistance to troubled sub-prime borrowers. Among them is the Neighborhood Assistance Corporation of America, which has committed $1 billion to help homeowners with unaffordable sub-prime mortgages keep their homes. Another is the Association of Community Organizations for Reform Now (ACORN). ACORN members met in June with Federal Reserve leaders, including Chairman Ben Bernanke, to discuss ways to curb the foreclosure crisis. They urged the Fed to protect families from predatory lenders by prohibiting adjustable-rate loans that quickly become unaffordable when the rate increases, banning prepayment penalties on all sub-prime loans and requiring sub-prime lenders to include taxes and insurance in the homeowner's monthly payment. Education is essential for sub-prime borrowers whose mortgages are delinquent or in default. Evidence: A survey of delinquent borrowers conducted by Freddie Mac that found 61 percent were unaware of the options that could help them overcome their short-term financial problems. The best option is to refinance into a non-sub-prime loan. Many borrowers were put in sub-prime loans when they could have qualified for more conventional financing. Still, others have improved their credit and financial profiles since closing their sub-prime loan. Another solution for sub-prime borrowers is to sell their home to take advantage of any equity in the home, and get out of the sub-prime loan before it damages their credit and causes financial strain. Finally, sound legal or financial advice, such as counseling offered by the non-profit Consumer Credit Counseling Service, can guide borrowers who find themselves in over their heads and on the path to damaging their credit. Despite all the concern, it is important to note that only a small percentage of mortgages--one out of five--is in the sub-prime category. In addition, 95 percent of all sub-prime mortgages are paid on time, according to the MBA. "Nobody wins when a loan goes into foreclosure, and it will take a team effort to find workable solutions that help keep people in their homes for the long term, and help them get into mortgages they can afford both today and tomorrow," said to John Robbins, CMB, chairman of MBA. Jim Van Law is executive vice president and northeast division manager for Orlando-Fla.-based Pinnacle Financial Corporation. He may be reached at (860) 494-4885 or e-mail [email protected].