FHA Mortgage Guide

One of the governors of the Federal Reserve, Randall S. Kroszner, spoke before the Congress yesterday and outlined the current mortgage situation as he saw it.

You ought to read this document, it will explain in large measure how we got where we are — and why things have not gotten better.

Gov. Kroszner explains that “as of January 2008, the most recent month for which data are available, about 24 percent of subprime adjustable-rate mortgages (ARMs) were 90 days or more delinquent, twice the fraction that were delinquent by this definition one year ago. For mortgages overall, more than 1.5 million foreclosures were started during 2007, up 53 percent from the previous year. All told, the consensus expectation is that the number of foreclosures in 2008 will likely exceed the number in 2007.

“Both delinquency and foreclosure are traumatic experiences for the families and communities affected,” says Kroszner. “Recent declines in house prices have eroded the equity that homeowners have in their homes, which has made it difficult or impossible for many of them to refinance their mortgage on more favorable terms compared to their current mortgage, even if interest rates have declined since they took out their loan. Tighter lending standards have also limited opportunities for these families to refinance. When struggling homeowners cannot put themselves on a sustainable financial footing, neighborhoods also suffer–properties are not maintained and foreclosures, particularly when they are clustered together, put further downward pressure on house prices. This is bad news for investors, too, because as property values decline, the substantial costs associated with foreclosure rise even further. Finally, falling home prices can have local and national consequences because of the erosion of both property tax revenue and the support for consumer spending that is provided by household wealth.”

This is all great stuff. What’s not said is this: The Federal Reserve failed to regulate lenders.

Last December the Fed suggested a number of regulatory changes to tighten the lending process. You could not find a more constricted set of proposals.

For instance, the Fed said that in the future it wanted to “prohibit a lender from engaging in a pattern or practice of lending without considering borrowers’ ability to repay the loans from sources other than the home’s value.”

In other words, if you could show that a lender had screwed a large number of borrowers you might be able to sue. However, if you alone were cheated that would be just dandy under the Fed’s proposal. As a comparison, imagine if a doctor treated you improperly and you lost your eye. You wouldn’t need to see if a lot of people were damaged by the doctor, your loss alone would be enough to claim a loss.

Under HOEPA — the Home Ownership and Equity Protection Act — the Federal Reserve has had the ability to stop option ARMs, the widespread use of interest-only loans, predatory prepayment penalties and the broad use of stated-income loan applications. It didn’t use this power and its December proposals are weak and will do little-if-anything to resolve the current mortgage meltdown.

Little wonder that Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, said that “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.”

Check out these FHA resources for more information

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