Several federal banking regulatory agencies are seeking comment on a proposed Statement on Subprime Mortgage Lending, spurred in part by a need to address certain risks and emerging issues related to subprime mortgage lending practices, specifically, particular adjustable-rate mortgage (ARM) lending products.
The statement, issued by the Federal Reserve Board, the FDIC, the National Credit Union Administration, the Office of the Comptroller of the Currency and the Office of Thrift Supervision, addresses concerns that subprime borrowers may not fully understand the risks of these products and that the products may pose an elevated credit risk to financial institutions. The guidance focuses on loans that involve repayment terms that exceed the borrower’s ability to service the debt without refinancing or selling the property.
This proposal was released on the heels of reports that the subprime mortgage market was hit with sharp increases in bad loans made to borrowers with weak credit. According to Morgan Stanley, 12.6% of all subprime mortgages were in foreclosure or serious delinquency by late 2006—that is, they were at least 90 days overdue.
The agencies’ request for comment focuses particularly on whether:
- These products always present inappropriate risks to institutions and consumers, or the extent to which they can be appropriate under some circumstances.
- The proposed statement would unduly restrict existing subprime borrowers’ ability to refinance their loans.
- Other forms of credit are available that would not present the risk of payment shock.
- The principles of the proposed statement should be applied beyond the subprime ARM market.
- An institution’s limiting of prepayment penalties to the initial fixed-rate period would assist consumers by providing them sufficient time to assess and act on their mortgage needs.
Comments are due May 7. The statement is available at www.federalreserve.gov.