Federal money policy agencies have opened for public comment new guidelines for subprime mortgage underwriting to ward off the growing number of subprime defaults and foreclosures.
The "Proposed Statement on Subprime Mortgage Lending" comes with 60-days of public comment and was jointly crafted by the same gang of federal monetary agencies that late last year rewrote the rules on nontraditional home loans and equity loans.
The effort is considered a "victory of sustainable homeownership" according to the Center For Responsible Lending..
Late last year, the Center's "Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners" said nearly 20 percent of all subprime mortgages originated in the last two years will ultimately end in foreclosure for some 2.2 million subprime holders. Losses will mount, rising to $164 billion in home values, much of it in home equity, in what will go down as the worst foreclosure rate in modern mortgage market history, the report said.
The proposed federal subprime policy shift comes of the heels of Freddie Mac announcing, among other things, it will no longer purchase subprime adjustable rate mortgages (ARMs) when lenders qualify borrowers at the introductory interest rate instead of considering affordability after the scheduled interest rate increases.
Subprime loans are generally more expensive than prime loans, but they are intended for borrowers who pose a greater risk to lenders, typically because of their lack of credit or previous credit problems.
The loans have been sold as an opportunity to achieve the American Dream for those who otherwise may have been locked out.
However, some consumers, those who can't afford subprime home loan payments, especially the escalating cost of subprime ARMS, they were sold a bill of goods.
The statement, crafted by the Department Of The Treasury, the Federal Reserve, the Federal Deposit Insurance Corporation, and the National Credit Union Administration is designed to prompt lenders to assess a borrower's true ability to repay a subprime loan.
Under scrutiny are the following practices:
- Offering low initial payments and loan approval based on a short introductory "teaser" rate that quickly expires and adjusts to a variable rate plus a margin.
- So called "no-doc" loans wherein lenders approve borrowers without sufficient income verifying documentation.
- "Payment shock," the practice of setting sky's-the-limit terms on how much payments or interest rates can increase.
- Product features that encourage frequent refinancing to maintain affordable monthly payments.
- Substantial prepayment penalties.
- Inadequate disclosures about loan features, risks, prepayment penalties and the additional costs of owning a home.
- Predatory subprime loans that contain one or more of the following elements: Writing loans based predominantly on the foreclosure or liquidation value of a borrower's collateral rather than on the borrower's ability to repay the mortgage; Inducing borrowers to become a serial refinancer so the lender cashes in on high points and fees; Fraud or deception to conceal the true nature of the mortgage loan obligation from an unsophisticated borrower.
The proposed federal subprime statement is also seeking more detailed consumer disclosures discussing payment shock, prepayment penalties, balloon payments, cost of no-doc loans and a borrower's responsibility for taxes and insurance.
