Regulators Tighten Subprime-Lending Rules [WSJ]
While Consumer Advocates Cheer the Move, Some Worry Changes May Limit Access to Credit
By DAMIAN PALETTA
June 29, 2007 8:34 p.m.; Page B1
WASHINGTON -- Federal bank, thrift and credit-union regulators issued beefed-up guidelines Friday aimed at curbing weak underwriting standards for "subprime" mortgage loans.
[Subprime]
The move was welcomed by consumer advocates, who had called for more-restrictive policies, while some in the banking industry argued that the changes could restrict many borrowers' access to credit.
The new policy comes after a record number of borrowers with these loans -- so named because they are generally made to consumers with shaky credit histories -- entered the foreclosure process at the end of 2006 and the beginning of 2007. Many of the homeowners were overwhelmed by flattening house prices and increases in monthly payments. These problems have forced dozens of companies out of business. Multiple Wall Street firms holding bonds backed by subprime mortgages are bracing for heavy losses.
The guidelines require more than 8,000 federally regulated lenders to underwrite loans based on a borrower's ability to make payments on a loan's adjusted rate, not just its low introductory rate. Roughly 75% of the subprime adjustable-rate mortgages offered last year were loans with a low flat or "teaser" rate for the first two or three years and then a higher, floating rate for the life of the 30-year mortgage.
The guidelines are very similar to a March proposal, with two significant changes.
First, with limited exceptions, the guidelines expect lenders to collect much more information to prove that borrowers have the capacity to pay. Second, lenders are directed to give borrowers the option to refinance out of an adjustable-rate mortgage at least 60 days before the interest rate jumps to a higher level, without penalty.
There isn't yet much consensus as to how the changes will affect the issuance of subprime mortgages. Indeed, some of the guidelines have already been implemented by the banking industry.
Kurt Pfotenhauer, senior vice president of government affairs at the Mortgage Bankers Association, said the guidelines were too restrictive and predicted they would force lenders to deny more borrowers access to mortgages.
"All regulatory actions come at a cost," Mr. Pfotenhauer said. "The people being stuck with the bill for this one are those who have been making successful use of [novel mortgage arrangements] and have paid their bills on time."
The reaction from banks was less critical. Both Washington Mutual Inc. and HSBC Holdings PLC's HSBC Finance Corp., two of the country's largest federally regulated lenders offering subprime loans, said they would comply with the new policies.
The guidelines wouldn't directly address Wall Street's involvement in the subprime market, but they could indirectly reduce the supply of these loans available for securitization.
When crafting the guidelines, regulators walked a fine line between trying to curb lending practices without imposing prohibitions that could kill a market that has helped many purchase homes.
"There is no doubt in my mind that anytime you put in more stringent standards you are likely to reduce the supply of credit," Comptroller of the Currency John Dugan said. "We don't do that lightly."
Steven Antonakes, Massachusetts' commissioner of banks, said state bank supervisors were working on a parallel version of the guidelines. Independent state lenders, which aren't supervised by the new federal guidance, originated more than half of all subprime loans last year. |
