The Center for Responsible Lending commends federal regulators who said today they would start requiring lenders to consider whether a borrower can repay when they make certain kinds of home loans.
But the regulators missed the boat in helping all the consumers at risk from mortgages that could blow up on them.
Lenders have sold billions of dollars of complicated, difficult-to-understand adjustable-rate option mortgages to homebuyers in the last few years without regard to their ability to repay.
As the banks pushed more people into buying houses they couldn't afford, the housing market boomed and lenders prospered. Now, as interest rates rise and the borrower's monthly house payments go up accordingly, many buyers are left high and dry, facing foreclosure; and the housing market is endangered, raising the possibility of a recession.
"Federal financial regulators took a step toward making the mortgage market safer for borrowers today," said Michael D. Calhoun, president of the Center for Responsible Lending, "although there is much more to do."
The Office of the Comptroller of the Currency, the nation's main federal bank regulator; the Board of Governors of the Federal Reserve System; the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Treasury Department and the National Credit Union Administration said Friday that lenders must tighten the standards for making loans that negatively amortize – that is, when the borrower's monthly payment is lower than the interest due, and the loan balance increases rather than decreases with every payment.
But regulators should expand their scrutiny to a much broader piece of the mortgage market – the more conventional sub-prime adjustable-rate mortgages, or ARMs, whose monthly payments can also sharply rise. They are known as "exploding ARMs," and like the negatively amortizing loans, lenders have pushed them on borrowers by flourishing low, introductory "teaser" rates that will sharply rise.
The Center for Responsible Lending, a nonprofit research and advocacy group that fights predatory lenders, finds several more places in the regulatory guidance, as it's called, where the regulators fell short in protecting consumers today.
It does not apply to state-regulated mortgage companies that make loans but don't take deposits. The regulators said they would work with regulators of these companies to set the same standards. It is important they do: Almost 60 percent of the loans in the sub-prime market, where people of modest means and with weaker credit ratings borrow, are not subject to scrutiny by the federal regulators issuing these guidelines today.
The regulators also say lenders must consider incentives for loan officers to make the best kind of loan to a borrower and not push only option adjustable-rate-mortgages simply because they are often more profitable for the lender. The Center for Responsible Lending urges regulators and banks to do more about this problem.
Finally, the center calls on lenders and the Wall Street firms that buy these loans to work with borrowers trapped in loans with payments they can't afford. The industry pushed these loans; now it has a duty to help borrowers avoid losing their homes.
"The lenders, the regulators, the consumer groups and consumers themselves must all do more to make sure these mortgages are bought and sold wisely and fairly," said Mr. Calhoun.