Lenders Urged to Help Homeowners in Trouble
In an effort to help borrowers from losing their homes, federal and state banking regulators urged lenders and investors to restructure the loans of millions of at-risk homeowners as their adjustable-rate mortgages reset to a higher rate.
In a joint statement made the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration and the Conference of State Banking Supervisors, lenders were called to "review to determine the full extent of their authority to identify borrowers at risk of default" and find a way to keep the borrower in a home.
The statement is a direct effort to address an issue that has bedeviled efforts to restructure loans in the past: Many loans are no longer on the books of the original bank or lender; they have been bundled with others and sold off as securities in the secondary market in a process known as securitization. The originator often remains the loan servicer -- collecting payments on the loan in return for a fee.
The guidance doesn't compel lenders and the investors who buy loans to restructure the loans. What it does is put an added burden on them to try to do so, while clarifying that they shouldn't face negative tax or accounting implications from such restructuring.
This is among the latest in a series of initiatives by regulators and the Bush administration to soften the blow of the subprime crisis.
"We cannot tolerate short-term modifications that put off the day of reckoning," Senate Banking Committee chairman Chris Dodd (D., Conn.) said in a statement. "Lenders and servicers must modify loans for long-term affordability."
It is unclear how many borrowers would be helped. FDIC Chairwoman Sheila Bair said rates will reset on 1.3 million subprime mortgages this year and on 1.2 million next year. She said borrowers are still making payments on 85% of the "hybrid" ARMs -- mortgages with rates that remain low for two or three years before resetting sharply higher for the remainder of the 30-year term -- that were underwritten in 2005. But most are at risk of becoming delinquent once their rate resets.
"We think those are good candidates for restructuring or refinancing," she said. The risk of delinquency is even greater for mortgages issued in 2006 when lenders further loosened terms for borrowers.
Published on September 5, 2007
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