Federal Reserve Governor Randall Kroszner gave Consumer Banks Association members a glimpse of Fed thinking at his speech yesterday before the Fair Lending Conference. He blames the current mess on employment losses (primarily in the hardest-hit auto industry-dependent states - Michigan and Ohio), slowing house price appreciation and the loosening of underwriting standards. No big surprise here, but he did leave out specific mention of the hardest hit foreclosure states - Nevada, California and Florida - in his discussion. Wonder why?
He said more than one-third of the subprime mortgages issued in the second half of 2005 and for all of 2006 were issued with second liens up from just 10% prior to that. Also, lenders failed to escrow taxes and insurance on many of these loans throwing borrowers into deeper trouble when those came due. Given that for many subprime borrowers this was their first home, they "did not fully anticipate the costs of taxes and insurances on the property," Kroszner said. In addition, while historically two-thirds of subprime loans were terminated through refinance or house sale before the interest-rate reset, that's not happening now because of "sluggish house price appreciation" and "too little equity to qualify for new loans"
He also gave us a glimpse of the staggering numbers. In each quarter from now until next year, monthly payments for more than 400,000 subprime mortgages are scheduled for their first interest rate reset. That's twice the number of resets per quarter in the first half of 2007. During the first half of 2007 about 200,000 loans reset per quarter. Getting a better idea of why foreclosure rates are doubling? And he's not even talking about the risky prime ARMs that also are due to reset in the second half of 2008 through 2010.
Funds for refinancing subprime loans are scarce and getting scarcer. He said, "The supply of funds for subprime loans is likely to remain low for some time as investors gather information and reevaluate risks." So where does that leave you if you have a subprime loan and need help? Kroszner recommends that you contact the Center for Foreclosure Solutions at 1-888-495-HOPE (4673). This hotline already has handled 100,000 calls and half of those calls were in the third quarter of 2007.
He also said that through a collaboration of housing counselors, mortgages services, investors and other mortgage market participants an outreach campaign to reach at-risk borrowers will start with a direct mail effort encouraging borrowers to contact their lender or a credit counselor. Eleven states attorneys general plus the Conference of State Bank Supervisors have a new Foreclosure Prevention Working Group that is looking for ways to prevent foreclosures and encourage increased loan modifications.
But even with all this in place he knows it's not enough. Kroszner called for "the industry to join together and explore collaborative, creative efforts to develop prudent loan modification programs and other assistance to help large groups of borrowers systematically." He also wants to see modernization of the FHA to allow it to get more involved in helping private-sector lenders to expedite the refinancing of credit worthy subprime borrowers.
What will the Fed actually do? The Fed is reviewing its mortgage-related rules and intends to issue proposals before the end of the year relating to a ban on deceptive advertising practices and to improve consumer disclosures. In addition expect to see new rules related to prepayment penalties, escrow practices for taxes and insurance, stated-income and low-documentation lending and adequate consideration of a borrower's ability to pay. For the Fed's part that seems like too little, and much too late, for many people. Why did the Fed sit on the sidelines so long and watch all this happen?
Lita Epstein has written more than 20 books including "The 250 Questions You Should Ask to Avoid Foreclosure" and "Complete idiot's Guide to the Federal Reserve."
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Reader Comments (Page 1 of 1)
11-06-2007 @ 1:04PM
william lindblad said...
The Fed needs a "Harry Potter" with a magic wand. The deeper concerns are how to revive the market and start to remove the glut of inventory. Dropping rates and using a Japan style of 100 year mortgage notes might be an option or simply let everything here take it's natural course and bottom out. While the latter is not economically desirable, there may be little that can done. The question that is yet to answered is just how big of a problem exists? We both know that the estimates vary widely and as yet, the complete list of note holders, write downs and all other things related is unknown. I am sure that the Fed has a much better idea and is working on a strategy to mitigate. Former chain Greenspan just released commentary noting the problem (known to all for the last two months), but not including any fix.
11-06-2007 @ 6:48PM
mortgage refinance said...
mortgage refinancing is still going to be hard in the future with the home prices going down
11-07-2007 @ 5:57PM
owclist.com said...
All the properties in foreclosure are staggering. I wonder what percentage are non owner occupied properties? Home sellers are going to have to employ alternative marketing strategies to keep from going under. I believe the popularity of owner carry backs (owner contracts), lease options & rent to owns will flourish in the near future and for some time to follow. All the people in foreclosure may want to be home owners again before their credit will allow it. And what did I hear today? They want to make it more difficult to get a mortgage for everyone?