The Sub-Prime Mortgage Crisis Has Borrowers Jumping Through More Hoops
Friday, June 29, 2007PAUL KANGAS: In Washington, Federal bank regulators are telling sub-prime mortgage lenders to clean up their act and tighten lending standards. The Federal Reserve says that means investigating borrowers more thoroughly and ending some of the industry's more controversial practices. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: With a record number of sub-prime mortgage loans in foreclosure, bank regulators are telling lenders to verify borrowers' income, instead of relying on their word. Federal Reserve Board Governor Randall Kroszner says lenders need to factor in escrow and tax payments and account for potential interest rate increases.
RANDALL KROSZNER, GOVERNOR, FEDERAL RESERVE BOARD: They key is that we're making sure that lenders think about the capacity to repay and do they have sufficient capacity and that means making sure that they know enough about the income that someone has to be able to make that judgment.
DHUE: The guidelines also call for lenders to give borrowers at least 60 days to refinance adjustable rate mortgages before their rates go up without paying any prepayment penalty. But the guidance doesn't apply to state regulated mortgage brokers, where most sub-prime loans are made. Consumer Federation's Allen Fishbein says the laws need to change to protect borrowers from abusive lending practices.
ALLEN FISHBEIN, HOUSING DIRECTOR, CONSUMER FEDERATION OF AMERICA: Guidelines send certain messages to lenders, but they don't protect consumers and we think there also needs to be strong upgrade in consumer protections.
DHUE: Top Democrats are urging the Federal Reserve to turn its guidance into regulation. Governor Kroszner says the Fed is taking a cautious approach.
KROSZNER: We want to make sure that responsible lending can get to people who can still use it responsibly and so trying to get that balance right is not an easy task.
DHUE: While lower home prices and increasing mortgage defaults are leading banks and investors to tighten credit standards, ISI analyst Andy Laperriere says today's move speeds up that process.
ANDY LAPERRIERE, ANALYST, ISI: Moving towards prudent lending standards is going to by definition tighten credit standards because I think they've been so lose for the last few years.
DHUE: The new guidance could make it more difficult for some borrowers to refinance into new loans. So regulators are encouraging lenders to work out existing loans whenever possible. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
