Federal Reserve advisory group warns foreclosures to get worse

Federal Reserve advisory group warns foreclosures to get worse

By Benton Ives-Halperin
Last Update: 5:47 PM ET Mar 8, 2007

WASHINGTON (MarketWatch) – Members of a Federal Reserve advisory panel on Thursday warned of a rising tide of U.S. mortgage foreclosures in the coming year, as subprime borrowers in particular are expected to feel the sting.

With Fed Chairman Ben Bernanke and three other Fed governors looking on, members of the Fed’s Consumer Advisory Council said the number of foreclosures in 2007 is expected to exceed the roughly 1.2 million from 2006.

“Foreclosures are at a historic high, and they’re going to get higher,” said Alan White, a supervisory attorney with Community Legal Services, adding that subprime loans represented about 50% of last year’s foreclosures.

“It’s getting to a point where it’s no longer an anecdotal problem, but it relates to the nature of the product,” White said, referring to the proliferation of subprime mortgage products.

While several council members painted an ominous picture of the future, they offered praise for recent guidance from federal banking regulators that could result in fewer borrowers qualifying for subprime loans.

The proposed guidance - issued last Thursday - would instruct lenders to be more conservative when underwriting certain adjustable-rate mortgages. At the time, regulators predicted their proposed guidelines would likely “result in fewer borrowers qualifying for the type of subprime loans” that they are targeting.

Mark Metz, a member of the council and senior vice president at Wachovia Corp. said “it’s very hard to argue with a lot of the guidance,” although he did offer a few caveats.

For example, Metz said he had concerns about elements of the guidance that stressed banks should avoid steering customers toward products that don’t have sound underwriting consumer protections.

“When you apply that to the prime market…you’re kind of controlling what products the banks can offer and then you’re getting into this suitability discussion,” Metz said.

Later in the discussions, Fed Governor Susan Bies offered a point of clarification on the scope of last week’s mortgage guidance, saying the regulators tried to “emphasize principles that would broadly apply to the mortgage market.” “We chose to highlight the subprime (market) because we felt that immediate attention needed to be on subprime,” Bies added.

Still, Bies was quick to add that members should speak up if they think the guidance shouldn’t be broadly applied “because we think the principles should be the foundation of any kind of loan.”

The Fed advisory council comprises representatives from community groups, law firms, lenders and other financial-services companies.

I’m not a financial whiz but I find it amazing that so many borrowers chose an adjustable rate loan over a very low fix rate. What was it a couple years ago 5-6%? I don’t get it.

Now a new threat may be looming in our future. Inflation and rising interest rates are way overdue.

The thing is that they didn’t choose to get into these loans, it was the only loan available to them as they wouldn’t have been able to meet the monthly mortgage payment of a conventional loan.

In other words in the real world these people would have never become homeowners without the lowered payments offered though the sub-prime market.