Shutting down subprime

From Bloomberg:

Countrywide’s Mozilo Says Regulators May Worsen Subprime Losses

Banking regulators may push more homeowners into foreclosure by making it tougher to refinance subprime mortgages, said Angelo Mozilo, head of the largest U.S. home-loan lender.

The Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency proposed guidelines last month that would encourage lenders to turn down borrowers who won’t be able to afford mortgages after “teaser” rates expire. Rates on loans to people with poor or limited credit are typically fixed for two or three years and then rise.

The plan is an “inadvertent attack on liquidity exactly when it shouldn’t happen,” Mozilo, co-founder and chief executive officer of Countrywide Financial Corp., said in a phone interview last week from his office in Calabasas, California.

The change would block more than half of subprime borrowers from refinancing mortgages at a time when slumping real estate prices have already caused delinquencies to rise to a four-year high, according to Mozilo. Teaser rates on almost 2 million subprime loans will expire in 2007 and 2008, according to First American Corp. a Santa Ana, California-based realty data firm.

Mozilo compared the proposals to the savings-and-loan crisis of the late 1980s, when he said more than 1,000 thrifts failed in part because regulators set rules that encouraged thrifts to buy bonds with credit ratings below investment grade and then forced them to sell, causing prices to tumble.
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Countrywide made $462 billion of home loans last year, or 15.5 percent of the total in the U.S., according to newsletter Inside Mortgage Finance.

Spokespeople for the Fed, OCC and FDIC declined to comment. Each of the agencies reacted differently to Mozilo after he raised his concerns, he said, declining to elaborate.
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About 20 percent to 30 percent of people who took out subprime mortgages in 2005 and 2006 won’t meet the financial thresholds regardless of whether the new guidelines are adopted because lenders aren’t lending as much against property values, according to debt strategists at Lehman Brothers Holdings Inc.

The main cause of delinquencies and defaults has been “flippers, speculators and people knowingly stretching themselves without the capability to get past any bump in the road,” Mozilo said.