Federal Banking Official Says Mortgage Defaults Will Grow

(EMAILWIRE.COM, March 12, 2007 ) SACRAMENTO, CA – According to U.S. Federal Reserve Governor Susan Bies, banks can expect more defaults on mortgages made to high-risk borrowers in the months to come. She believes that mortgage default rates among so-called ‘subprime’ borrowers, already high, will continue to grow.“What’s happening is the front end of this wave of teaser- rate loans that are coming into full pricing…this is not the end, this is the beginning,'’ said Bies recently at a meeting in North Carolina. Bies has been the highest ranking bank policy official at the United States central bank.The loans to risky borrowers that Bies refers to comprise 7 percent of all mortgages made in the United States in the past several years, and missed payments on these mortgages have been rising since the Spring of 2006. Bies is not alone in her concerns as other regulators have been calling for greater scrutiny of bank lending practices and policies.Several factors are seen as responsible for the state of concern. One of these is the situation that occurs when an initial low-interest rate and correspondingly low payment are, after a time period, say two years, increased dramatically. Many borrowers were making payments on adjustable rate mortgages (ARMs) that did not have a portion dedicated to reducing the principal amount owed. In effect the “pay option-ARMs” allowed borrowers to pay a very small amount of money each month that was only paying interest at a low ‘teaser’ rate.After the introductory rate period expires payments can increase dramatically. Because the adjustable rate mortgage loans payment goes up when interest rates rise, as they have during the past several years, this acts as a double whammy on borrowers who now have to pay principal back and higher levels of interest.Many borrowers, especially those with poor understanding of credit and complex financial instruments such as mortgages, are surprised that they are no longer able to quickly sell a house that has declined in value. They are often also unable to refinance their mortgage due to banks’ tightening lending standards. Another factor that is punishing consumers is the fact that they sometimes face huge prepayment penalties if they try to pay off their mortgage via a refinance or sale to a new buyer.“Many of the people who call my company and who want to sell us a house are unable to refinance their property or keep current on their mortgage payments, and the vast majority of people in this situation have an adjustable rate mortgage,” said Patrick McGilvray, J.D., President of http://www.TheHomeBuyingCenter.com. “To make matters even worse their homes are worth less than what they owe on their mortgages before their prepayment penalty is even taken into account.”All of the above factors referred to by Bies and McGilvray are components in the storm facing the subprime mortgage market. Many economists believe that despite the deep problems in this area of the real estate market there should be limited damage to the rest of the economy. “We’re seeing this in a very narrow segment,'’ Bies said. “We’re watching for contagion, we haven’t seen it.'’Regulators are calling for greater disclosure of terms to borrowers and more stringent underwriting guidelines. Late payments on residential loans attained a new four-year high-watermark in the final quarter of 2006.Patrick McGilvray, J.D.Tel: 916-920-3278patrick@thehomebuyingcenter.comhttp://www.thehomebuyingcenter.com### This press release was issued through GroupWeb EmailWire.com. For more information on press release distribution, go to http://www.emailwire.com.

Patrick McGilvray, J.D.
Patrick McGilvray, J.D.

patrick@thehomebuyingcenter.com