Subprime guidance “won’t make a dent in the subprime crisis”

From the Baltimore Sun:

New U.S. guidelines curb but don’t ban risky home loans

It won’t mean the end to no-income verification or high-risk mortgages for subprime homebuyers, but new guidance from federal financial regulators will almost certainly cut their availability sharply.

In a long-awaited policy statement on loans to borrowers with imperfect credit histories, federal financial regulators a week agourged banks, credit unions and their mortgage subsidiaries to verify income, assets and employment on all loans except in special cases where borrowers could demonstrate substantial financial reserves.
…
The policy guidelines, which took effect immediately nationwide, also instructed lenders to underwrite adjustable-rate subprime mortgage applicants at the “fully indexed” interest rate, not at a deeply discounted teaser rate. During the housing boom years, many lenders had lured credit-impaired homebuyers into “2/28” and “3/27” adjustable-rate mortgages featuring discounted fixed payments for the first two or three years.

After the discount period, payments sometimes soared 50 percent or more, putting homebuyers in serious financial jams. Large numbers of those borrowers are now delinquent on their loan payments and at risk of foreclosure.

The new guidelines target other once-popular lender practices, but do not ban them outright. For example, many subprime 2/28 and 3/27 adjustable mortgages also carried heavy prepayment penalties – up to six months of interest – designed to discourage borrowers from refinancing before the end of the discounted rate period.
…
The federal regulators also stressed that lenders should only approve subprime adjustable loans “based on the borrower’s ability to repay the loan according to its terms.” That doesn’t amount to a formal “suitability” test, but it does require lenders to determine that the loan is appropriate to the applicant’s financial status and capacity to handle payments.

The guidelines also instruct lenders to make certain that every subprime applicant understands the risks built into the loan itself, including higher costs in connection with any reduced documentation, prepayment penalties and the borrower’s responsibility to keep track of tax and insurance payments if the loan lacks an escrow account.

Consumer advocates generally welcomed the new guidelines but were quick to point out that they won’t make a dent in the subprime crisis or prevent lenders from issuing new mortgages with toxic features.

Not only must state financial regulators adopt mirror-image guidelines to cover mortgage brokers and independent lenders, but even then the guidelines “do not have the force of regulations” or law, said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.

Adoption of the new guidelines state by state “is going to take months, and in the meantime, a lot of consumers will still be getting loans with the same old harmful features,” said Fishbein.