Research Rewind: Ignoring the Mortgage Warning Signs
Eating crabs on the Chesapeake Bay I noticed this story in the newspaper lining the table:
Nontraditional Mortgages Don’t Wane Under Warnings
by Kirstin Downy, Washington Post Staff Writer
excerpt:
“The lower monthly payments of nontraditional loans have been particularly attractive because home prices have risen so quickly. But regulators have said they worry consumers don’t understand that payments on the loans can double or even triple, and that if they pay less than full payment toward principal and interest, they run the risk of seeing their mortgage balance rise, even after years of payments. Most homeowners are making only the minimum payments, according to banking data.”
“Last month, federal banking regulators issued a warning to federally regulated lenders, including banks, thrifts and credit unions, that the loans could pose risks for lending institutions because consumers can be unprepared for the sudden jumps in payments, known as “payment shock.” These jumps could lead to loan defaults, causing losses for the lenders. Lenders outside of federal oversight, who make 60 percent of these loans, were not affected by the regulators’ warning.”
The article’s date? October 24, 2006.
An archive search turned up the following (emphasis added):
Insurers Urge Action On Risky Mortgages; Firms Want More Loan Restrictions
(Aug 19,2006)
“Many borrowers are paying as little as possible. About 70 percent of the people who take out an option adjustable-rate mortgage, which lets the buyer avoid paying even the full interest on the loan, end up paying the lowest permissible amount each month, according to the Federal Deposit Insurance Corp., which regulates banks. The amount unpaid is added to the mortgage balance, so borrowers end up owing more than when they started. Having no equity in a home increases the risk of foreclosure, especially when housing values fall and houses are hard to sell.”
Regulators To Issue Mortgage Warning; Bank Chief Seeks to Rein In Risky Deals
(Apr 7, 2006)
excerpt:
Speaking to the New York Bankers Association, John M. Reich, director of the Office of Thrift Supervision, warned that some lenders are making it too easy for unsophisticated borrowers to take on risky nontraditional mortgages that they may not fully understand. Reich said regulators are “closely monitoring” the growth of loan types in which the payments can suddenly double, creating a payment shock that could force borrowers into foreclosure if housing values were to fall and could also cause financial losses for the lenders who make the loans.”
and
Interest-Only: Borrower Beware; Popular but Risky Mortgage Draws Government Scrutiny
(Dec 21, 2005)
excerpt
“The federal government yesterday announced that it was considering new restrictions on these nontraditional loans. Lenders would be expected to require borrowers to have higher down payments and better credit, to verify their income, and to be able to withstand a future payment increase, according to proposed “guidance” from the regulators. Lenders would also be required to explain the loans more carefully to borrowers.”
The warning signs were there, and reported in the general media: we just didn’t heed them.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
