NEW--"substl Doubt of viability:-- Subprime Crackdown Regulators Seek Tighter Standards; New Century Probe
By JAMES R. HAGERTY, DAMIAN PALETTA and LINGLING WEI
March 3, 2007
Federal bank regulators announced a crackdown on loose lending standards on subprime home mortgages as two major lenders struggled to cope with losses and regulatory problems.
New Century Financial Corp., one of the nation's largest subprime lenders, announced that it has been informed of a federal criminal inquiry into its accounting and trading in its securities. New Century also said that a failure to obtain waivers from lenders or find new funding sources could prompt its auditors to warn of "substantial doubt" over its ability to remain in business.
Another big lender, Fremont General Corp., said it plans to stop making subprime residential loans and is in talks with various parties aimed at selling that business. Subprime loans are those for people with weak credit records or high debt in relation to income.
A proposed policy statement released Friday by regulators comes after rising defaults already have rattled investors and forced subprime lenders to be more cautious in extending credit. "There seems to be a growing realization that not everybody can buy a house today," said Scott Stern, chief executive of Lenders One, a St. Louis-based cooperative for mortgage-banking firms. Lenders will have to tell some borrowers to save for a down payment, he said.
Amid a surge in subprime lending in the past decade, many lenders have pushed home loans that carry a fixed rate for the first two years, then "reset" to a much higher rate that floats with the general level of interest rates. These loans -- known as 2/28 mortgages -- can lead to jumps of 50% or more in monthly payments after the initial period ends. Many of the borrowers refinance to avoid these "payment shocks," generating more fees for lenders and mortgage brokers.
The regulators, including the Federal Reserve and four other agencies, said lenders should assess whether potential borrowers can cope with payments once the higher rate takes effect. They also cautioned lenders against skimping on verification of borrowers' income, and told them to clearly spell out risks to consumers. Lenders and other interested parties have 60 days to comment before the regulators produce a final version of the guidance.
John Dugan, who heads the Office of the Comptroller of the Currency, which regulates national banks, said in an interview that it isn't clear how many borrowers could be shut out of the market by this guidance. Regulators are eager for lenders' comments on that point, he said. Mr. Dugan noted that investors in mortgage securities already have forced lenders to make fewer risky loans, such as those that don't require down payments or documentation of income. "The market is already adjusting," he said.
Originations of subprime mortgages are likely to decline 30% to 35% this year from 2006, when they totaled around $600 billion, or about a fifth of the entire mortgage market, said Robert Lacoursiere, a mortgage analyst at Bank of America Corp. in New York. That will put a further dent in demand for housing at a time when builders are struggling with excess supply.
Many borrowers who took out 2/28 subprime loans subject to unpredictable future costs could have qualified for 30-year fixed-rate loans at roughly comparable interest rates, said Sheila Bair, chairman of the Federal Deposit Insurance Corp., one of the regulatory agencies involved. Even now, she said, "it looks to me like a lot of them could be transitioned into a 30-year fixed."
Democratic leaders in Congress, who have been making a political issue of rising defaults and foreclosures, praised the regulators' move. So did many nonprofit groups that have long campaigned against subprime-lending practices they deem "predatory."
But the Mortgage Bankers Association, a trade group in Washington, said the guidance, "if adopted as proposed, may restrict credit to many consumers in high-cost areas and deny credit to many deserving low-income, minority and first-time homebuyers."
New Century, Irvine, Calif., said the company learned of the federal probe in a letter from the U.S. attorney for the central district of California. Staff members of the Securities and Exchange Commission also have requested a meeting with New Century to discuss events leading up to last month's announcement that the company would restate earnings for the first three quarters of 2006 due to what it called "errors" in accounting and reporting of losses on loan repurchases. New Century said it expects to report pretax losses for the fourth quarter and for all of 2006.
New Century said it is seeking waivers of financing arrangements that require it to report at least $1 of net income for any two consecutive quarters. New Century said there is no assurance it can get the waivers from all lenders but is in talks with the lenders and "has made progress."
Fremont said its Fremont Investment & Loan unit expects to enter into an agreement with the FDIC that will require it to retain "qualified management," revise lending policies, ensure that borrowers are given sufficient information, submit a plan for shoring up capital and limit payment of cash dividends without regulatory approval. Fremont expects to report a loss from continuing operations for the fourth quarter but said it isn't yet able to estimate its results for the quarter and full year. |
