David Beck
02-15-2007, 03:45 PM
Folks –***Sorry for x-posts but there’s growing concern* that regulators may not clarify that subprime hybrid ARMs are subject to the same underwriting standards as non-traditional mortgages, and therefore that millions of families will lose their homes to foreclosure because lenders stuck them with loans they knew full well the families could never afford. *So, a number of groups, including the Center for Responsible Lending, have drafted the below*sign-on letter to federal banking regulators calling on them to clarify that the recent regulatory guidance they issued to protect borrowers receiving prime non-traditional mortgages also protects subprime borrowers of hybrid ARMs*.
*
Apparently a decision may be close at hand, and most of the regulators are being resistant to taking this small but important step. *So we’re trying to close the letter by 3:00 on Monday with as many signers as possible. *Please email back to josh.nassar@responsiblelending.org (josh.nassar@responsiblelending.org) with your organization name, location and number of people you represent if you can sign-on.* You do not need to get your organization to sign on; if you prefer we will include a tag-line that organizations are for identification purposes only.* Just let us know if you want that distinction.
For background last fall the regulators issued a Guidance on Nontraditional Mortgage Product Risk. *However, it is unclear if this guidance applies to subprime hybrid 2-28 and 3-27 adjustable rate mortgages, loans made to vulnerable borrowers that pose the identical risk of severe payment shock that the guidance is intended to prevent.
*
Thanks for your quick consideration of this matter and please forward this to any email networks of your own. *
*
Sincerely,
*
David Beck
Self-Help Policy and Media Director
www.self-help.org (http://www.self-help.org/)*919 956-4495
*
*
Dear Chairman Bernanke, Chairwoman Bair, Comptroller Dugan, Director Reich, Chairwoman Johnson, and Mr. Milner:
*
We commend you for issuing the Guidance on Nontraditional Mortgage Product Risk this past fall. We are hopeful that the guidance will curb some of the abuses associated with high risk, non-traditional loan products.* However, despite your recent efforts, we remain extremely concerned that millions of high-risk, unaffordable loans are not covered by the guidance and that massive payment shocks built into these loans will cause a foreclosure crisis comparable in scale to Hurricane Katrina.* Specifically, subprime hybrid 2-28 and 3-27 adjustable rate mortgages pose the identical risk of severe payment shock that the guidance is intended to prevent.*
*
We therefore call upon you to protect American families by issuing supplementary guidance to clarify that subprime hybrid ARMs are subject to the same underwriting standards as non-traditional mortgages, particularly the requirement of underwriting at the fully indexed rate.* It is at least as important for subprime borrowers as it is for prime interest-only or negative amortization borrowers that “an institution’s analysis of a borrower’s repayment capacity should include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate . . . .”[1] (outbind://113/#_ftn1)* The severity of the current problem demonstrates that simply reiterating past guidance is not sufficient.* We also call on the Conference of State Bank Supervisors to take similar action for state regulated entities.
*
Subprime lenders generally make hybrid ARMs without considering whether the borrower can afford the loan past the initial teaser rate, making the loan in effect a two-year balloon.* Acute subprime payment shock is a significant issue because the sector comprised 23% of loan originations last year.[2] (outbind://113/#_ftn2) A mid-year 2006 analysis from Fitch Ratings reported that 2-28 subprime ARMs carried a built-in payment shock of 29% even if interest rates remain unchanged, [3] (outbind://113/#_ftn3) and since LIBOR increased 1.09% by year-end, the Fitch analysis suggests current payment shock of 48%.*
*
Subprime borrowers, however, are particularly ill suited to bear high payment shock because they are financially stretched already -- loans are commonly underwritten to 50% to 55% debt-to-income ratios.* In addition, this nominal payment shock understates the real shock subprime borrowers face for two reasons: (1) half the time lenders use stated rather than documented income,[4] (outbind://113/#_ftn4) income that has been shown to be exaggerated 90% of the time,[5] (outbind://113/#_ftn5) and (2) lenders fail to escrow for property taxes and hazard insurance,[6] (outbind://113/#_ftn6) lump sums that subprime borrowers need to pay but have trouble budgeting for.[7] (outbind://113/#_ftn7)* It is no wonder that, according to the MBA National Delinquency Survey, subprime loans constitute over 60% of foreclosures but just 13% of outstanding mortgages.[8] (outbind://113/#_ftn8)
*
A majority of home loans in 2005 to African-American families were subprime loans, the overwhelming majority of which were 2-28s and 3-27s, and 40% of loans to Latinos were also in this category.[9] (outbind://113/#_ftn9) *By contrast, approximately 80% of home loans during this time period to white families were prime loans, the market sector in which products covered by the guidance are more common.* Unless the underwriting standards from the guidance are clarified to also cover 2-28s and 3-27s, the guidance will afford limited protection to the market sector that disproportionately affects minority borrowers.* Clarifying the guidance is an important step in the process of protecting homeowners from current market abuses.
*
We look forward to working with you on this important matter. Thank you for your consideration.
*
Sincerely,
*
[1] (outbind://113/#_ftnref1) Interagency Guidance on Nontraditional Mortgage Product Risks at 20.
[2] (outbind://113/#_ftnref2) Subprime Mortgage Origination Indicators, Inside B&C Lending (November 10, 2006).
[3] (outbind://113/#_ftnref3) Structured Finance: U.S. RMBS Criteria for Subprime Interest-Only ARMs, FITCH RATINGS CREDIT POLICY (Oct. 4, 2006).
[4] (outbind://113/#_ftnref4) Structured Finance: U.S. Subprime RMBS in Structured Finance CDOs, FITCH RATINGS CREDIT POLICY (August 21, 2006), at 4.
[5] (outbind://113/#_ftnref5) Mortgage Asset Research Institute, Inc., Eighth Periodic Mortgage Fraud Case Report to Mortgage Bankers Association, p. 12, available at http://www.mari-inc.com/pdfs/mba/MBA8thCaseRpt.pdf (April 2006).
[6] (outbind://113/#_ftnref6) See, e.g. “B&C Escrow Rate Called Low,” Mortgage Servicing News Bulletin (February 23, 2005).
[7] (outbind://113/#_ftnref7) Partnership Lessons and Results: Three Year Final Report, p. 31 Home Ownership Preservation Initiative, (July 17, 2006) at www.nhschicago.org/downloads/82HOPI3YearReport_Jul17-06.pdf (http://www.nhschicago.org/downloads/82HOPI3YearReport_Jul17-06.pdf).
[8] (outbind://113/#_ftnref8) Mortgage Bankers Association, National Delinquency Survey – Third Quarter 2006.
[9] (outbind://113/#_ftnref9) Based on 2005 data submitted under the Home Mortgage Disclosure Act.
This post transferred from the cdb-l mailing list
*
Apparently a decision may be close at hand, and most of the regulators are being resistant to taking this small but important step. *So we’re trying to close the letter by 3:00 on Monday with as many signers as possible. *Please email back to josh.nassar@responsiblelending.org (josh.nassar@responsiblelending.org) with your organization name, location and number of people you represent if you can sign-on.* You do not need to get your organization to sign on; if you prefer we will include a tag-line that organizations are for identification purposes only.* Just let us know if you want that distinction.
For background last fall the regulators issued a Guidance on Nontraditional Mortgage Product Risk. *However, it is unclear if this guidance applies to subprime hybrid 2-28 and 3-27 adjustable rate mortgages, loans made to vulnerable borrowers that pose the identical risk of severe payment shock that the guidance is intended to prevent.
*
Thanks for your quick consideration of this matter and please forward this to any email networks of your own. *
*
Sincerely,
*
David Beck
Self-Help Policy and Media Director
www.self-help.org (http://www.self-help.org/)*919 956-4495
*
*
Dear Chairman Bernanke, Chairwoman Bair, Comptroller Dugan, Director Reich, Chairwoman Johnson, and Mr. Milner:
*
We commend you for issuing the Guidance on Nontraditional Mortgage Product Risk this past fall. We are hopeful that the guidance will curb some of the abuses associated with high risk, non-traditional loan products.* However, despite your recent efforts, we remain extremely concerned that millions of high-risk, unaffordable loans are not covered by the guidance and that massive payment shocks built into these loans will cause a foreclosure crisis comparable in scale to Hurricane Katrina.* Specifically, subprime hybrid 2-28 and 3-27 adjustable rate mortgages pose the identical risk of severe payment shock that the guidance is intended to prevent.*
*
We therefore call upon you to protect American families by issuing supplementary guidance to clarify that subprime hybrid ARMs are subject to the same underwriting standards as non-traditional mortgages, particularly the requirement of underwriting at the fully indexed rate.* It is at least as important for subprime borrowers as it is for prime interest-only or negative amortization borrowers that “an institution’s analysis of a borrower’s repayment capacity should include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate . . . .”[1] (outbind://113/#_ftn1)* The severity of the current problem demonstrates that simply reiterating past guidance is not sufficient.* We also call on the Conference of State Bank Supervisors to take similar action for state regulated entities.
*
Subprime lenders generally make hybrid ARMs without considering whether the borrower can afford the loan past the initial teaser rate, making the loan in effect a two-year balloon.* Acute subprime payment shock is a significant issue because the sector comprised 23% of loan originations last year.[2] (outbind://113/#_ftn2) A mid-year 2006 analysis from Fitch Ratings reported that 2-28 subprime ARMs carried a built-in payment shock of 29% even if interest rates remain unchanged, [3] (outbind://113/#_ftn3) and since LIBOR increased 1.09% by year-end, the Fitch analysis suggests current payment shock of 48%.*
*
Subprime borrowers, however, are particularly ill suited to bear high payment shock because they are financially stretched already -- loans are commonly underwritten to 50% to 55% debt-to-income ratios.* In addition, this nominal payment shock understates the real shock subprime borrowers face for two reasons: (1) half the time lenders use stated rather than documented income,[4] (outbind://113/#_ftn4) income that has been shown to be exaggerated 90% of the time,[5] (outbind://113/#_ftn5) and (2) lenders fail to escrow for property taxes and hazard insurance,[6] (outbind://113/#_ftn6) lump sums that subprime borrowers need to pay but have trouble budgeting for.[7] (outbind://113/#_ftn7)* It is no wonder that, according to the MBA National Delinquency Survey, subprime loans constitute over 60% of foreclosures but just 13% of outstanding mortgages.[8] (outbind://113/#_ftn8)
*
A majority of home loans in 2005 to African-American families were subprime loans, the overwhelming majority of which were 2-28s and 3-27s, and 40% of loans to Latinos were also in this category.[9] (outbind://113/#_ftn9) *By contrast, approximately 80% of home loans during this time period to white families were prime loans, the market sector in which products covered by the guidance are more common.* Unless the underwriting standards from the guidance are clarified to also cover 2-28s and 3-27s, the guidance will afford limited protection to the market sector that disproportionately affects minority borrowers.* Clarifying the guidance is an important step in the process of protecting homeowners from current market abuses.
*
We look forward to working with you on this important matter. Thank you for your consideration.
*
Sincerely,
*
[1] (outbind://113/#_ftnref1) Interagency Guidance on Nontraditional Mortgage Product Risks at 20.
[2] (outbind://113/#_ftnref2) Subprime Mortgage Origination Indicators, Inside B&C Lending (November 10, 2006).
[3] (outbind://113/#_ftnref3) Structured Finance: U.S. RMBS Criteria for Subprime Interest-Only ARMs, FITCH RATINGS CREDIT POLICY (Oct. 4, 2006).
[4] (outbind://113/#_ftnref4) Structured Finance: U.S. Subprime RMBS in Structured Finance CDOs, FITCH RATINGS CREDIT POLICY (August 21, 2006), at 4.
[5] (outbind://113/#_ftnref5) Mortgage Asset Research Institute, Inc., Eighth Periodic Mortgage Fraud Case Report to Mortgage Bankers Association, p. 12, available at http://www.mari-inc.com/pdfs/mba/MBA8thCaseRpt.pdf (April 2006).
[6] (outbind://113/#_ftnref6) See, e.g. “B&C Escrow Rate Called Low,” Mortgage Servicing News Bulletin (February 23, 2005).
[7] (outbind://113/#_ftnref7) Partnership Lessons and Results: Three Year Final Report, p. 31 Home Ownership Preservation Initiative, (July 17, 2006) at www.nhschicago.org/downloads/82HOPI3YearReport_Jul17-06.pdf (http://www.nhschicago.org/downloads/82HOPI3YearReport_Jul17-06.pdf).
[8] (outbind://113/#_ftnref8) Mortgage Bankers Association, National Delinquency Survey – Third Quarter 2006.
[9] (outbind://113/#_ftnref9) Based on 2005 data submitted under the Home Mortgage Disclosure Act.
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