Proof of income from borrowers. No penalties for early mortgage payments. And a guarantee that property taxes and insurance bills are covered. The Federal Reserve is considering these and other measures as a way to remedy the troubled market for high-risk, or subprime, mortgages. The central bank held an all-day hearing on the matter Thursday.
Lawmakers are pushing the Fed to act as late payments and new foreclosures on adjustable-rate home mortgages made to people with spotty credit climbed to all-time highs in the first three months of the year.
"We have had more than enough talk," Sen. Sherrod Brown, D-Ohio, said in a statement. His state has been hit particularly hard by a wave of foreclosures. "The Federal Reserve should have acted long ago to stamp out the abuses we have seen in Ohio and across the country."
Industry executives are urging the Fed not to limit the availability of credit by overreacting to the problems in the market, while consumer groups say the central bank should have cracked down on abusive mortgage practices years ago.
The Mortgage Bankers Association reported Thursday that the percentage of payments that were 30 or more days past due for subprime adjustable-rate mortgages jumped to 15.75% in the January-to-March quarter. That was a sizable increase from the late 2006 delinquency rate of 14.44% and the highest on record, said Doug Duncan, the association's chief economist.
Foreclosure filings, meanwhile, were up 90% in May compared with last year, according to industry data firm RealtyTrac.
Many people who took out subprime mortgages, especially adjustable-rate loans, have recently been clobbered by a combination of rising interest rates and weak home prices, making it increasingly difficult for them to keep up with their monthly payments.
Lenders in the subprime market have also been hard hit, and some have been forced out of business.
Subprime Adjustable-Rate Mortgages
The percentage of subprime adjustable-rate mortgages that started the foreclosure process in the first quarter of this year climbed to 3.23%. That compared with 2.7% in the final quarter of 2006 and was the highest on record, Duncan said.
The first-quarter's increase in new foreclosures was mostly driven by problems in California, Florida, Nevada and Arizona, he said.
On Thursday, investment banks Goldman Sachs Group and Bear Stearns both reported that the mortgage market's problems hurt their second-quarter profits.
"This is a moment of great concern in our economy as to whether subprime is going to pull us all down," said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business.
Meanwhile, after taking on risky adjustable-rate loans or multiple mortgages to pay less upfront during the housing boom, borrowers with limited capital for down payments are increasingly opting for safer fixed-rate mortgages backed by private mortgage insurance.
Applications for private mortgage insurance rose 56% in March from February, according to the Mortgage Insurance Companies of America, an industry trade group. Volume fell in April but remained well above last year's levels.
Nearly 2 million adjustable-rate mortgages are resetting to higher rates this year and next, setting up a potential new wave of foreclosures with uncertain economic impact.
"Certainly the headlines haven't been pretty," President Bush's housing secretary, Alphonso Jackson, said in a speech at a mortgage market conference in Washington. Jackson called the current housing slump "a needed correction" of an overheated market, which still has room to grow, he said.