Federal bank regulators, worried about a surge in defaults on high-risk home mortgages, called on lenders to exercise caution in making subprime loans and strictly evaluate borrowers' ability to repay them.
The proposed guidance issued Friday by the Federal Reserve and the other four federal agencies that regulate banks, thrifts and credit unions, comes in an increasingly troubled market for subprime mortgage loans. Home-mortgage delinquencies and foreclosures are spiking, especially for people who took out subprime mortgages -- higher-interest loans for those with blemished credit records or low incomes who are considered higher risk -- during the sizzling housing boom that waned in the second half of 2005.
The regulators said the guidelines, if formally adopted by the agencies and followed by lending institutions, could result in fewer borrowers qualifying for subprime loans. The mortgage industry had hoped for less stringent guidelines.
John Robbins, chairman of the Mortgage Bankers Association, said the group was concerned that the guidelines "may restrict credit to many consumers in high-cost areas and deny credit to many deserving low-income, minority and first-time home buyers."
Not to sound cold-blooded, but the MBA statement sounds like nothing more than a soundbite. 20% of the loans Countrywide services are delinquent; according to UBS 2006 vintage subprime loans are performing poorly right out of the gate.
This isn't about denying credit to worthy borrowers who need a break; it's about not issuing credit simply because someone has a pulse.
In addition, here's some really big news:
On Tuesday, Freddie Mac, the nation's second-largest financer of home loans, said it will stop buying those subprime mortgages that it deems most vulnerable to default or foreclosure.
Translation: liquidity is drying up -- big time.