Bad Credit Mortgage Guidance to Remain Intact

Bad credit home loan guidance opposed by some of the nation’s biggest lenders will be “largely intact” when completed by a group of regulators later this month, Federal Deposit Insurance Corp. Chairman Sheila Bair said on Wednesday.

The FDIC is one of five regulators that have proposed subprime mortgage underwriting guidance in an effort to stave off risks to consumers and the U.S. banking system. The guidance is opposed by Countrywide Financial Corp., which has said it will prevent credit-worthy borrowers from obtaining a loan.

“Our draft will be largely intact when we finalize it,” she said, addressing the annual meeting of the American Securitization Forum in New York. The guidance “is simple common sense,” she added.

Among controversial rules, the regulators are urging lenders to qualify borrowers using adjustable-rate home loans at the highest rate the consumer would have to pay during the life of the loan, instead of the initial “teaser” rate. That clause probably will be included in the final guidance, she said.

The regulators, which also include the Federal Reserve and the Office of the Comptroller of the Currency, are reviewing comments from more than 100 industry participants, she said. Most of the comments have been supportive of the proposed guidance given the dire state of the industry.

Countrywide executives have said that some 60 percent of borrowers given adjustable-rate loans made last year wouldn’t have qualified under the “fully indexed” rate. About half the subprime customers with adjustable-rate loans were able to mortgage refinance into a prime loan before payments on the original mortgage rose.

However, lenders have failed to prove to regulators that those borrowers wouldn’t be better served with a fixed-rate home loan.

“Why do you need this payment shock feature to get people into homes? I really don’t understand that,” she said.

The regulator group last year adopted similar underwriting guidelines for so-called ‘non-traditional’ loans such as interest-only and payment-option adjustable-rate mortgages.

Countrywide and other lenders failed in their bid to get regulators to drop language guiding them to underwrite the loans at the highest rate that could be incurred.

SOURCE: Reuters