Tighter rules sought for subprime mortgages

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March 04, 2007|By Jonathan Peterson | Jonathan Peterson,Los Angeles Times

As more Americans default on home loans, federal regulators and members of Congress are looking to place new restrictions on mortgages for people with shaky credit, a move that could make it harder for many people to buy homes or refinance their mortgages.

Government officials on Friday issued for public comment proposals to address problems that have rattled the mortgage-lending industry and left growing numbers of people in homes they cannot afford.

These measures call on lenders to exercise caution in making such loans and to closely evaluate borrowers' ability to repay them. Other proposals being considered include requiring that such loans be granted only to those who have the ability to make payments for the entire mortgage, rather than just an initial period with a "teaser" rate that later shoots up, typically adding hundreds of dollars to the monthly payment.

Another proposal would ensure that consumers receive fuller disclosures about their loans, so that fees and rate increases do not catch them by surprise.

Regulators, under pressure from Democratic lawmakers, are putting together the new guidelines on the high-cost loans.

"We think additional guidance is necessary to address abuses in the market," said Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency.

The issue has emerged as growing numbers of borrowers with "subprime" mortgages - loans designed for people with weak credit or erratic income - fall behind on their payments.

There have been growing signs of pressure on borrowers who were enticed into such mortgages by terms that seemed appealing but became onerous as their monthly payments rose and home values fell. The matter has proved troubling for officials because the high-cost loans have helped make homeownership possible for millions of people with credit problems or limited finances.

"The challenge for regulators is to firm up standards without cutting off credit to the people who need it most - especially first-time homebuyers and minority borrowers," said Howard Glaser, a mortgage industry consultant and former U.S. housing official.

Sen. Christopher J. Dodd, the Connecticut Democrat who heads the Senate banking committee and who is running for president, is pushing regulators to ensure that lenders enhance disclosures in such loans and limit them to borrowers who can make payments for the life of the loan.

Democratic Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee, seeks to pass a law to stop predatory lending. His committee will hold hearings within the next few months aimed at producing a bill that would ensure that borrowers in the high-cost market have adequate protections.

Victims of predatory lending can tell heart-wrenching tales, a reality that was on display at a Senate hearing last month.

Delores King, a Chicago retiree, recalled how a telemarketer lured her into a mortgage refinance. At the time, she had a monthly payment of $798. Her new loan, which started out at $832, has since adjusted to $1,488 a month. "This is more than my entire monthly income," she told lawmakers.

Such tales have caught the attention of regulators. Lenders say the horror stories can obscure the fact that high-cost loans help make homeownership possible to people who might otherwise not qualify for a mortgage.

"The danger here is that, in an ultimately ironic fashion, the very people you're trying to help are the ones you hurt the most," said Kurt Pfotenhauer, senior vice president with the Mortgage Bankers Association.

Much of the current flap is focused on the 80 percent of subprime loans that come with a low, two-year introductory rate, then may adjust 30 percent to 40 percent higher. Many of these loans come with expensive prepayment penalties - meaning the homeowner must pay thousands of dollars if forced to refinance.

To top it off, subprime lenders often approve these loans without considering whether the borrower can actually afford the loan.

Jonathan Peterson writes for the Los Angeles Times.

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