Will Banking Regulators Worsen The Foreclosure Crisis?

Today, Jody Shenn of Bloomberg reports on another potential problem facing homeowners struggling with their mortgage payments.

"Banking regulators may push more homeowners into foreclosure by making it tougher to refinance subprime mortgages, said Angelo Mozilo, head of the largest U.S. home-loan lender."

"The Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency proposed guidelines last month that would encourage lenders to turn down borrowers who won't be able to afford mortgages after ``teaser'' rates expire. Rates on loans to people with poor or limited credit are typically fixed for two or three years and then rise. "

I'm already starting to see many lending institutions and investors tighten underwriting standards which hurts the very people whom need help the most. If this trend continues you'll likely see the foreclosure problem spread as many more homeowners will be 'locked out' from the chance to refinance t0 a lower payment loan.

"The change would block more than half of subprime borrowers from refinancing mortgages at a time when slumping real estate prices have already caused delinquencies to rise to a four-year high, according to Mozilo."

"Teaser rates on almost 2 million subprime loans will expire in 2007 and 2008, according to First American Corp. a Santa Ana, California-based realty data firm."

"Mozilo compared the proposals to the savings-and-loan crisis of the late 1980s, when he said more than 1,000 thrifts failed in part because regulators set rules that encouraged thrifts to buy bonds with credit ratings below investment grade and then forced them to sell, causing prices to tumble."

-Bill Burniece