|Fed Seeks to Mitigate Foreclosures, Says Fed Governor Kroszner
Many factors have contributed to the rising number of foreclosures and early payment defaults on subprime mortgages, "but the role of abusive lending practices is of particular concern," said Federal Reserve Governor Randall S. Kroszner in a speech at the American Securitization Forum 2008 Conference in early February. "Such practices have led many people into homeownership that they cannot sustain, hurting their families as well as their neighbors and communities," he noted. These same practices have also undermined investor confidence, virtually shutting down the subprime market and making it more difficult for borrowers with shorter or weaker credit records to obtain home loans.
Acting now to prevent a wave of defaults
"Loan-by-loan modifications can help some, but they require substantial time and effort," said Kroszner. He believes a systematic approach is needed that lets servicers reach troubled borrowers more quickly and prevent more foreclosures. He applauded the efforts already under way to streamline the refinancing and modification of subprime adjustable-rate mortgages, challenging mortgage servicers to reduce the constraints on capacity.
Protecting those most at risk
"The proposed regulations," Kroszner said, "are designed to protect consumers from excessive layering of risk even as the practices that increase risk may change." Risk layering refers to the complex ways that risk factors and underwriting practices can affect each other. The proposed regulation uses a loan's annual percentage rate, which is closely related to risk, to determine the threshold for stricter regulations, thus ensuring that the protections would cover loans with higher risks rather than single out particular risk factors or underwriting practices.
February 25, 2008