From the Philadelphia Inquirer:
Horror stories concerning so-called subprime mortgage loans have become common as more and more financially unsophisticated borrowers find themselves unable to pay their house notes.
Adjustable interest rates have risen and balloon payments become due even as housing prices have dropped. So long as housing values were going up, people could pre-empt a balloon payment by refinancing at lower rates. But as the housing market collapsed in many areas, borrowers couldn’t refinance.
Nationally, the proportion of delinquent payments by subprime borrowers with adjustable-rate loans is at its highest in five years, according to a Mortgage Bankers Association survey. Pennsylvania hit a five-year high in delinquencies at the end of 2006, but has seen a dip in the first three months of this year. New Jersey remains close to its five-year high.
Some of Bair’s proposed national standards are no-brainers:
One requires that loan underwriters assess borrowers’ ability to make monthly payments not on the basis of the low introductory rates but the subsequent higher rate.
Another would require the presumption that a loan is unaffordable if the debt (including taxes and insurance) exceeds 50 percent of the borrower’s income.
A third would require initial teaser interest rates to be advertised only alongside the full adjustable interest rate on that loan and the 30-year fixed rate offered by that lender.
Bair is also trying to get Wall Street firms that deal in mortgage-backed securities to make loan restructurings easier to avoid foreclosures. After all, too many foreclosures hurt investors as well.
In the meantime, defaults are expected to get worse as subprime loans with teaser rates made in the last two years – a particularly prolific period for them – are “re-set” at higher interest rates. The FDIC, Federal Reserve Board and other federal and state regulators need to act quickly on the new rules and trade practices necessary to forestall a calamity.