In remarks focused almost entirely on mortgage lending at the 2008 American Securitization Forum Monday morning, Federal Reserve governor Randall Krozner said that "more must be done as the number of households facing resets increases." Krozner in particular singled out mortgage servicers, who he said "must undertake the investment to overcome the capacity challenges and provide transparent and timely measures of results." The reason is a burgeoning pace of adjustable-rate resets among subprime borrowers, set to peak during 2008. From Krozner's speech, an admision that EPDs are a big problem:
As of November, the most recent month for which data are available, about 20 percent of subprime adjustable-rate mortgages (ARMs) were ninety or more days delinquent, twice the level one year earlier. More than 171,000 foreclosures were started on these mortgages in the third quarter, up 36 percent from the previous quarter. The significance of the problems with subprime loan performance is evident in the unusually high rate of defaults within a few months of loan origination, known as early payment defaults. In November, nearly 7 percent of subprime ARMs originated in the previous six months were already ninety or more days delinquent, twice the rate of the year before and nearly four times the rate two years earlier.
As HW reported last week, a large percentage of these losses are being driven by so-called jingle mail, or borrowers walking away from their homes. Krozner's remarks centered on the Fed Board's participation in the Financial Stability Forum, which recently proposed expanding the scope of the Home Ownership and Equity Protection Act (HOEPA) in an effort to reign in mortgage lending practices. "First is a requirement that a lender maintain responsible underwriting practices that genuinely assess borrowers' ability to repay," Korzner said, in outlining the group's core proposal. "This general requirement would be complemented by a specific requirement to verify borrowers' income and assets. "A third rule would require lenders to escrow property taxes and homeowners insurance to help borrowers meet these obligations." While the items in the Fed's proposal in many ways echo subprime guidance issued late last June, Krozner said the proposal now under consideration is considerably broader in scope -- in addition to applying to Alt-A loans, it would give some "teeth" to prior guidance:
It bears emphasis, however, that our proposed regulations would be more robust and comprehensive than the guidance. The regulations would apply to all mortgage lenders, including independent mortgage companies. Guidance, in contrast, does not ensure uniformity of coverage. Moreover, the regulations would be legally enforceable by supervisory and enforcement agencies. Just as important, the regulations, unlike the guidance, would be legally enforceable by consumers. Borrowers who brought timely actions could recover statutory damages for violations, above and beyond any actual damages they suffered.
Read the full text of Krozer's speech here.