Fed issues new lending guidelines

Jill Barshay Jun 29, 2007
HTML EMBED:
COPY

Fed issues new lending guidelines

Jill Barshay Jun 29, 2007
HTML EMBED:
COPY

TEXT OF STORY

SCOTT JAGOW: It seems like common sense that if you’re lending someone 100 or 200 grand to buy a house, you oughta make sure they have the means to pay it back. Verify their income, perhaps, instead of taking their word for it. But a lot of lenders didn’t do their homework during this big mortgage boom that’s turned into a bust. And now, a lot of people are hurting.

Home foreclosures are at a five-year high. Today, the Federal Reserve put out a set of guidelines for subprime lenders. The only thing is, these “standards” are voluntary. So, what’s the point? Our story comes from Jill Barshay in New York.


Jill Barshay: The new guidance affects mortgages known as 2-28s and 3-27s. They suck borrowers in with a super low fixed rate. In the case of the 2-28, after two years, the rate jacks up. It can continue rising for the remaining 28 years of the mortgage. These kinds of mortgages account for 70 percent of all subprime home loans. Many Americans have lost their homes after that initial payment jump.

Randall Kroszner is one of five governors at the Federal Reserve. He oversees banking supervision and consumer protection. His new guidelines say banks shouldn’t lend unless they’re sure borrowers will be able to pay their mortgages after the teaser rate expires.

RANDALL KROSZNER: That means making sure that the borrower has a capacity to repay if the rate were to go up to the highest that it can in the contract.

Deborah Goldstein is an executive vice president at the Center for Responsible Lending. She says the guidelines are a good first step.

Deborah Goldstein: The regulators in this guidance made a statement that’s very important, that it’s not a solution for borrowers to be able to refinance from one bad affordable loan into another one.

Unfortunately, Goldstein says, the new guidelines apply to only federally regulated banks, like Bank of America. Those banks make up only half the subprime industry. The other half includes the most abusive lenders. They’re state regulated so they can continue selling these risky loans.

It’s up to state regulators to bring the rest of the subprime lenders into line. But that could take a while. The Fed has extraordinary powers that it could use. The Fed’s Kroszner says he’s thinking about it.

In New York, I’m Jill Barshay for Marketplace.

As a nonprofit news organization, our future depends on listeners like you who believe in the power of public service journalism.

Your investment in Marketplace helps us remain paywall-free and ensures everyone has access to trustworthy, unbiased news and information, regardless of their ability to pay.

Donate today — in any amount — to become a Marketplace Investor. Now more than ever, your commitment makes a difference.

Raise a glass to Marketplace!

Just $7/month gets you a limited edition KaiPA pint glass. Plus bragging rights that you support independent journalism.
Donate today to get yours!