Subprime loan defaults jump - Consumer advocates press Fed for action
Subprime loan defaults jump - Consumer advocates press Fed for action
Copyright © 2007, Chicago Tribune
Published June 15, 2007
WASHINGTON -- Consumer advocates on Thursday demanded the Federal Reserve write strict rules to end abusive lending practices, saying the central bank hasn't acted forcefully enough to curb delinquencies and foreclosures in the subprime mortgage market.
They made their demands at a hearing held on the same day that a new report showed the number of Americans who could lose their homes because of late mortgage payments rose to a record in the first quarter, led by subprime borrowers pinched by an economy that grew at the slowest pace in four years.
The share of all mortgages entering foreclosure rose to 0.58 percent in the first quarter from 0.54 percent in the fourth quarter, according to a quarterly report from the Mortgage Bankers Association. Subprime loans entering foreclosure jumped to a five-year high of 2.43 percent from 2 percent in the fourth quarter, and prime loans rose to 0.25 percent, the highest ever, from 0.24 percent.
It was worse for subprime borrowers who took out adjustable-rate mortgages. The association said the percentage of payments that were 30 or more days past due for subprime ARMs jumped to 15.75 percent in the first quarter. That's the highest level ever and up from 14.44 percent in the fourth quarter. The percentage of subprime ARMs that started the foreclosure process climbed to 3.23 percent, also a high, from 2.70 percent.
People who have taken out subprime mortgages, especially ARMs, have been clobbered as rising interest rates and weak home prices have made it increasingly difficult for them to keep up with their monthly payments. Some lenders in the subprime market have been forced out of business.
Analysts estimate that nearly 2 million ARMs will reset to higher rates this year and next. Some subprime borrowers were lured by initially low "teaser" rates offered during the five-year housing boom that ended in 2005. But those rates can spike upward after the first few years, causing payment shocks.
"Housing is in a recession, and we're seeing that reflected in prices," said Doug Duncan, chief economist for the group. "If you're in a position where you can refinance or sell, but house prices have fallen below your outstanding loan balance, you're in trouble."
The consumer advocates spoke at a public meeting the Fed held to gather feedback from the mortgage industry and public as it examines its rulemaking authority under a 1994 mortgage consumer-protection law.
The Fed meeting was called in response to criticism from Congress that the central bank wasn't doing enough to protect consumers. On Wednesday, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, threatened to strip the Fed of its power to write consumer-protection rules, telling Fed Governor Randall Kroszner "use it or lose it."
Kroszner said at the start of Thursday's hearing that policymakers would "seriously consider" tougher rules. He also warned that the Fed "must walk a fine line" and be careful not to restrict consumers' access to credit.
"Nibbling around the edges isn't going to solve this problem," Alys Cohen, attorney at the National Consumer Law Center, said at the hearing. "It's incumbent upon the Federal Reserve to act to prohibit loans that are unaffordable by requiring an analysis of ability to repay."
Industry representatives defended some of the practices the Fed is considering restricting, including prepayment penalties and loans that don't require verification of a borrower's stated income.
Copyright © 2007, Chicago Tribune
Published June 15, 2007
WASHINGTON -- Consumer advocates on Thursday demanded the Federal Reserve write strict rules to end abusive lending practices, saying the central bank hasn't acted forcefully enough to curb delinquencies and foreclosures in the subprime mortgage market.
They made their demands at a hearing held on the same day that a new report showed the number of Americans who could lose their homes because of late mortgage payments rose to a record in the first quarter, led by subprime borrowers pinched by an economy that grew at the slowest pace in four years.
The share of all mortgages entering foreclosure rose to 0.58 percent in the first quarter from 0.54 percent in the fourth quarter, according to a quarterly report from the Mortgage Bankers Association. Subprime loans entering foreclosure jumped to a five-year high of 2.43 percent from 2 percent in the fourth quarter, and prime loans rose to 0.25 percent, the highest ever, from 0.24 percent.
It was worse for subprime borrowers who took out adjustable-rate mortgages. The association said the percentage of payments that were 30 or more days past due for subprime ARMs jumped to 15.75 percent in the first quarter. That's the highest level ever and up from 14.44 percent in the fourth quarter. The percentage of subprime ARMs that started the foreclosure process climbed to 3.23 percent, also a high, from 2.70 percent.
People who have taken out subprime mortgages, especially ARMs, have been clobbered as rising interest rates and weak home prices have made it increasingly difficult for them to keep up with their monthly payments. Some lenders in the subprime market have been forced out of business.
Analysts estimate that nearly 2 million ARMs will reset to higher rates this year and next. Some subprime borrowers were lured by initially low "teaser" rates offered during the five-year housing boom that ended in 2005. But those rates can spike upward after the first few years, causing payment shocks.
"Housing is in a recession, and we're seeing that reflected in prices," said Doug Duncan, chief economist for the group. "If you're in a position where you can refinance or sell, but house prices have fallen below your outstanding loan balance, you're in trouble."
The consumer advocates spoke at a public meeting the Fed held to gather feedback from the mortgage industry and public as it examines its rulemaking authority under a 1994 mortgage consumer-protection law.
The Fed meeting was called in response to criticism from Congress that the central bank wasn't doing enough to protect consumers. On Wednesday, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, threatened to strip the Fed of its power to write consumer-protection rules, telling Fed Governor Randall Kroszner "use it or lose it."
Kroszner said at the start of Thursday's hearing that policymakers would "seriously consider" tougher rules. He also warned that the Fed "must walk a fine line" and be careful not to restrict consumers' access to credit.
"Nibbling around the edges isn't going to solve this problem," Alys Cohen, attorney at the National Consumer Law Center, said at the hearing. "It's incumbent upon the Federal Reserve to act to prohibit loans that are unaffordable by requiring an analysis of ability to repay."
Industry representatives defended some of the practices the Fed is considering restricting, including prepayment penalties and loans that don't require verification of a borrower's stated income.
posted by Carlos T Mock at 7:59 AM
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