Bad Credit Mortgage Lenders Must Work Together to Solve Woes

Reuters - The long list of participants in the subprime/bad credit mortgage crisis will not go unscathed in sharing the pain, but should work together to find solutions to the problem, a U.S. banking regulatory official said on Wednesday.

“I believe there is more than enough blame to go around,” Sara Kelsey, general counsel of the Federal Deposit Insurance Corporation, said.

In a speech to a group of financial professionals, Kelsey sounded off a long list of market participants who are likely to learn a “hard lesson” from what regulators, lawmakers and the lending industry expect is a tsunami of defaults and foreclosures over the next years.

The pain starts with borrowers and then home mortgage brokers and bankers to brokerage firms, parties involved in securitizing mortgages, domestic and foreign investors, and insurance companies, she said.

The list also includes pension funds, mutual funds and hedge funds, as well as banks that provided money to each of the market participants, she added.

She said data suggest 52 percent of subprime mortgages are originated by independent mortgage banking companies, 23 percent by banks and thrifts, 13 percent by mortgage banking subsidiaries of bank and thrifts and 12 percent by mortgage banking units of bank and thrift holding companies.

The business of lending to people with poor credit had boomed in recent years as home values rose in a super-heated real estate market. The spread of adjustable-rate mortgages and other new loans also allowed more people to buy their own homes.

The Federal Reserve encouraged this but also has hiked interest rates. Now with housing prices cooling and interest rates up, defaults and foreclosures are up sharply on subprime loans. Monthly payments on variable mortgages are likely to increase as lenders reset mortgage rates this year and next.

“I believe that the hard lesson we are all learning from the current situation will involve shared pain, all along the line,” Kelsey said.

She said all parties have to roll up their sleeves and work together to bring liquidity back into securitization for subprime mortgages.

With that in mind the FDIC and other regulators are planning to host a forum on April 16 with participants in the subprime mortgage securitization to discuss ways to jump-start the funding and still protect as many vulnerable subprime borrowers as possible.

Default rates in the subprime segment of the U.S. mortgage market have soared amid a housing industry slowdown. At least 20 subprime lenders have quit or sold their businesses.

The crisis has triggered broad concerns that fallout from the industry may spread and damage the economy. Regulators and industry officials were scrutinized in the last several days by U.S. lawmakers who plan to hold additional hearings.

Kelsey said lending to bad credit home loan borrowers did not cause the current crisis because she said both borrowers and banks have benefited for years from these arrangements.

“Rather, the situation is the result of predatory lending practices and poor underwriting controls,” she said.