WASHINGTON - Tens of thousands of borrowers would be disqualified from taking out a mortgage under new guidance approved last week by NCUA and the banking regulators.
The guidance comes as home foreclosures-especially those tied to exploding subprime mortgages-are skyrocketing, prompting calls by Congress and consumer advocates for action to protect borrowers.
The new guidance requires 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. About 75% of all subprime ARMs offered last year were so-called exploding loans with low flat, or "teaser" rates for the first two or three years, then a higher, floating rates for the life of the 30-year mortgage.
The new guidance will also require lenders to collect more information to determine a borrower's ability to repay the loan.
They also require the lenders give the borrowers the option of refinancing out of an ARM at least 60 days before the interest rate jumps to a higher level, without paying a penalty.
The guidance is not mandatory but is used by examiners when monitoring compliance with consumer regulations.
Michael Calhoun, president of the Center for Responsible Lending, a consumer lobby organized by Self Help CU, applauded the regulatory initiative but said more must be done. The Center, which has emerged as a major voice against predatory lending on Capitol Hill, estimates that as many as 2.2 million homeowners who got their homes through subprime mortgages since 1998 will lose their homes through foreclosure, representing a whopping $250 billion in defaulted home loans.
The crisis in subprime mortgages has spread far beyond those homebuyers to Wall Street and Main Street, as several large subprime loan funds have failed recently and required propping up with new capital, and investors have cut back their appetite for mortgage backed securities, one of the main sources of liquidity for the mortgage market.
Calhoun said more must be done and he called on the Federal Reserve to take further action against abusive lending practices. "Congress has given the Federal Reserve Board a mandate to issue rules that would apply to all lenders. It is too late for the board to stop the losses that have already occurred, but the Center for Responsible Lending calls on the Fed to act now to prevent abusive subprime loans in the future," said Calhoun.
Congress is already debating legislation that would reign in some subprime lending practices, including a ban on some of the exploding ARMs and limiting prepayment penalties.
