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].
