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Fed Governor Sees Worsening Subprime Picture

Higher ARM rates have yet to kick in for many homeowners

By Mark Huffman
ConsumerAffairs.com

November 5, 2007

“Looking ahead, two considerations suggest that conditions for subprime borrowers have the potential to get worse before they get better,” Kroszner told the group.

The first problem, he says, is that all indications show that housing activity is continuing to weaken. Incoming data in recent weeks show that sales and new residential construction have continued to fall. In such an environment, house prices are likely to remain flat, if not actually decline.

But a bigger problem, he says, is that most of the adjustable rate mortgage resets have yet to occur. That means many more homeowners could face unaffordable increases in their mortgage payments and this years record foreclosure rate could quickly be eclipsed.

“On average, in each quarter from now until the end of next year, monthly payments for more than 400,000 subprime mortgages are scheduled to undergo their first interest rate reset,” Kroszner said. “That number is up from roughly 200,000 per quarter during the first half of 2007. Delinquencies and foreclosures are therefore likely to continue to rise for a number of quarters.”

The Federal Reserve's recent surveys of senior loan officers at banks have showed a significant tightening of standards on subprime loans. In addition, many lenders that dealt only in subprime loans have gone out of business, and other large lenders have cancelled some subprime lending programs.

The issuance of new securitized pools of subprime loans has dwindled in the past couple of months, and judging from the few deals that are being placed, spreads are extremely wide, Korszner said.

“The supply of funds for subprime loans is likely to remain low for some time as investors gather information and reevaluate the risks,” he said.

Kroszner said the worsening situation calls for a high degree of collaboration and innovation by lenders, regulators and community leaders to help distressed homeowners to stay in their houses. He said lenders and loan servicers should look for ways to work with borrowers having difficulty in meeting their mortgage loan obligations.

“Working out arrangements that are consistent with safe and sound lending practices are generally in the long-term interests of both the financial institution and the borrower,” he said.

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