New guidelines for subprime

From the Philadelphia Inquirer:

A move to ensure people can repay

Banking regulators completed guidelines yesterday that call on lenders to strictly evaluate borrowers’ ability to repay home loans.
The guidance, issued by the Federal Reserve and the four other federal agencies that regulate banks, thrifts and credit unions, is a response to an increasingly troubled housing market and pressure from Congress. Home prices have been falling and interest rates have been climbing – two factors that are causing a sharp increase in defaults, especially on so-called subprime mortgages given to buyers with shaky credit.

The new standards, which apply only to federally regulated lenders, call for verification of borrowers’ incomes in most cases. They also say consumers should be given clear disclosure of their mortgage terms and at least 60 days without penalty to refinance a loan that is about to jump up to a higher rate. Noncompliance could result in warnings and financial penalties for the lenders.

Trade groups representing mortgage lenders said the guidelines come with a downside – they will reduce the availability of credit for borrowers – and they urged Congress not to pass legislation that would put similar standards into law.

Lawmakers, some of whom accuse the Fed of having been lax in its oversight of the mortgage market for many years, have been urging the central bank to strengthen the guidelines. Although the guidelines would not affect state-regulated mortgage companies, many state banking regulators are expected to follow suit.

In addition to the Fed, the agencies issuing the new guidance are the Federal Deposit Insurance Corp., the National Credit Union Administration, and the Treasury Department’s Office of the Comptroller of the Currency and Office of Thrift Supervision.

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13 Responses to New guidelines for subprime

  1. James Bednar says:

    From the Wall Street Journal:

    Regulators Tighten Subprime-Lending Rules
    While Consumer Advocates Cheer the Move,
    Some Worry Changes May Limit Access to Credit
    June 30, 2007

    Federal bank, thrift and credit-union regulators issued beefed-up guidelines Friday aimed at curbing weak underwriting standards for “subprime” mortgage loans.

    The move was welcomed by consumer advocates, who had called for more-restrictive policies, while some in the banking industry argued that the changes could restrict many borrowers’ access to credit.

    The new policy comes after a record number of borrowers with these loans — so named because they are generally made to consumers with shaky credit histories — entered the foreclosure process at the end of 2006 and the beginning of 2007. Many of the homeowners were overwhelmed by flattening house prices and increases in monthly payments. These problems have forced dozens of companies out of business. Multiple Wall Street firms holding bonds backed by subprime mortgages are bracing for heavy losses.

    The guidelines require more than 8,000 federally regulated lenders to underwrite loans based on a borrower’s ability to make payments on a loan’s adjusted rate, not just its low introductory rate. Roughly 75% of the subprime adjustable-rate mortgages offered last year were loans with a low flat or “teaser” rate for the first two or three years and then a higher, floating rate for the life of the 30-year mortgage.

    The guidelines are very similar to a March proposal, with two significant changes.

    First, with limited exceptions, the guidelines expect lenders to collect much more information to prove that borrowers have the capacity to pay. Second, lenders are directed to give borrowers the option to refinance out of an adjustable-rate mortgage at least 60 days before the interest rate jumps to a higher level, without penalty.

    There isn’t yet much consensus as to how the changes will affect the issuance of subprime mortgages. Indeed, some of the guidelines have already been implemented by the banking industry.

    Kurt Pfotenhauer, senior vice president of government affairs at the Mortgage Bankers Association, said the guidelines were too restrictive and predicted they would force lenders to deny more borrowers access to mortgages.

    “All regulatory actions come at a cost,” Mr. Pfotenhauer said. “The people being stuck with the bill for this one are those who have been making successful use of [novel mortgage arrangements] and have paid their bills on time.”

  2. Greg says:

    Does this mean that you have to be able to repay the mortgage? Thats not fair! Its unamerican.

  3. HOUSE OF CARDS says:

    You take away the housing bubble and refi ATM, you take away discretionary retail sales

    Picture is worth 1000 words.

  4. HOUSE OF CARDS says:

    S&P, Moody’s Mask $200 Billion of Subprime Bond Risk (Update2)

    By Mark Pittman

    “For Sale” and “Open House” signs June 29 (Bloomberg) — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.

    The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don’t meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.

    That may just be the beginning. Downgrades by S&P, Moody’s and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets.

    “You’ll see massive losses from banks, insurance companies and pension managers,” said Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York and co-author of a study last month that said S&P, Moody’s and Fitch understate the risks of subprime mortgage bonds. “The longer they wait, the worse it’s going to be.”

    Loss Estimates

    Rosner estimates that collateralized debt obligations, which have packaged thousands of bonds and derivatives into new securities, will lose $125 billion. Institutional Risk Analytics, a Hawthorne, California-based company that writes computer programs for accounting firms, says 25 percent of the face value of CDOs is in jeopardy, or $250 billion.

    Losses may rival the savings and loan crisis of the 1980s and 1990s. The Resolution Trust Corp., formed by the U.S. government to resolve the thrift crisis, sold $452 billion of assets at a cost to taxpayers of about $140 billion.

  5. Lindsey says:

    First, from JB’s first post:

    “All regulatory actions come at a cost,” Mr. Pfotenhauer said. “The people being stuck with the bill for this one are those who have been making successful use of [novel mortgage arrangements] and have paid their bills on time.”

    Yes, and the people being stuck with the bill for the last regulatory action (inaction) are going bankrupt, losing their homes and making a shambles of quite a few real estate markets around the country right now, and will continue to do so for at least another year.

    Another worthless shill is the source for another poorly conceived newspaper story. Idiots.

  6. Lindsey says:


    Re post 4:


    Thanks for pointing to that. I’m not sure how these hedge funds pulled it off for so long, but it looks like the game is up.

    as for this:

    Losses may rival the savings and loan crisis of the 1980s and 1990s. The Resolution Trust Corp., formed by the U.S. government to resolve the thrift crisis, sold $452 billion of assets at a cost to taxpayers of about $140 billion.

    The last time I looked, the federal government (or any other government for that matter) doesn’t insure these investments the way the FDIC insures bank deposits.

  7. Brits getting slaughtered in Florida housing “spectacular collapse”

    Property-mad Brits (they love their housing ladder), who also love going to Florida on holiday (why for the life of me I can’t figure out) are getting destroyed now that Florida’s housing market is crashing.

    And it’s not just the price cuts – if they borrowed from their bank in GBP the exchange rate and transfer fees to US$ are killing them too.


    Funniest thing is you have conmen and sweet talkers still aggressively courting ignorant property-mad Brits to invest in Florida property. Take this one for example. Or this one. Crashing market? Terrible fundamentals? Exchange rate nightmare? Nah! Now’s a great time to buy!

    Florida is a HOT market for Foreign National’s to purchase both Second Homes and Investment Properties.

    This is a great time and a great market for their purchases. With the weak dollar and the strong Euro and British Sterling, European investment in Florida is at an all time high!

    However, here’s the truth, thanks to the Daily Mail:

    Britons count the cost of the Florida property slump

    Hundreds of British investors who pumped their money into Florida’s soaring housing market have been caught out in its spectacular collapse.

    Many bought apartments off-plan, hoping to sell them on at a huge profit as soon as they were built.

    However, they have been left with property they can’t sell – even for less than the original price – because of rising interest rates and a glut of condominiums for sale.

    Florida house prices have been plunging for 18 months, but research shows investors in high-rise condos have been hurt the most.

  8. ALERT:

    ARM- Adjustable Rate mortgage- reset schedule that Credit Suisse produced:

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