Big Fix, Little Fix, No Fix

by Peter G. Miller
March 27th, 2008

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I read a speech today by Federal Reserve Governor Randall S. Kroszner and it, er, raised a few questions….

“As of January 2008, the most recent month for which data are available, about 24 percent of subprime adjustable-rate mortgages (ARMs) were ninety or more days delinquent, twice the level one year earlier. Roughly 190,000 foreclosures were started on these mortgages in the fourth quarter, up 11 percent from the previous quarter. The significance of the problems with subprime loan performance is evident in the unusually high rate of defaults within a few months of loan origination, known as early payment defaults. In January 2008, nearly 9 percent of subprime ARMs originated in the previous six months were already ninety or more days delinquent, twice the rate of the year before and nearly four times the rate two years earlier.”

“These problems have many causes,” said Kroszner, speaking before a meeting of the National Association of Hispanic Real Estate Professionals, “but the role of abusive lending practices is of particular concern. Such practices have led many people into homeownership that they cannot sustain, and have had adverse effects on their neighbors and communities as defaults and foreclosures can lead to declines in the values of surrounding properties. Practices that have hurt consumers have also undermined the confidence of investors and contributed to a virtual shutdown of the subprime market with consequences for other segments of the mortgage market. As a result, it is difficult for many borrowers, especially in the subprime space, to obtain home loans. The implications of diminished access to mortgage credit are of particular concern to the audience today, given that the subprime market was the source of home purchase loans extended to many in the Hispanic community.”

What practices, exactly, should concern borrowers? For instance, if a borrower who qualifies for an FHA loans is sold a higher-cost subprime product, is that an example of lender abuse? If so, what — exactly — is the Federal Reserve going to do about it? What about predatory prepayment penalties? Fiduciary obligations?

I’m not re-assured when a governor of the Federal Reserve tells listeners that “the Federal Housing Administration has established the FHASecure plan to provide qualified borrowers who are delinquent because of an interest rate reset and who have some equity in the home the opportunity to refinance into an FHA-insured mortgage.”

Really? And just what kind of a dent has the FHASecure program made in the 190,000 foreclosures that were begun in the last quarter of 2007? Does Mr. Kroszner know that only a few hundred delinquent conventional borrowers have benefited from the program each month for the last several months?

The Federal Reserve is now proposing the weakest possible standards to regulate lenders — other than the standards we have now. As Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee said, “The staff of the Financial Services Committee and I have had a chance to review the Federal Reserve’s proposed rules regarding abusive subprime loans. We now have confirmation of two facts we have known for some time: one, the Federal Reserve System is not a strong advocate for consumers, and two, there is no Santa Claus. People who are surprised by the one are presumably surprised by the other.”

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