Senator Jim Bunning, Chairman of the Banking Subcommittee on Economic Policy, is hoping for a slower rate of appreciation in home prices, not a drop. Let’s toast to hope!

No wonder I can’t get loan data – not even the federal regulators have it! Amazing! None of the top people at the hearing from the OTS, FDIC, Treasury, etc., knew how much of these loans were being held by the banks, vs. how much was sold as MBS.

Although the senators questioned the panel about the impact of the resets, none of the federal regulators would make a prediction on what will happen when these loans reset. They kept bypassing the question, answering with “we don’t have any problems yet with these loans…” Only the state regulator from Arizona said she was very concerned but the “train has already left the station”.

All federal regulators concurred that *the most important* point of the guidance is the requirement that borrowers are qualified based on the fully amortized payment, instead of just the initial teaser rate.

The Chairman of Republic Mortgage Insurance is concerned about another housing debacle. In the 1980/90’s housing bust, they paid $15 billion in claims. What will it be this time?

Subprime hybrid ARMs, mainly marketed to minorities, can end up with payments more than the borrower’s gross income! The spokesman for the Center for Responsible Lending explained the 2/28 ARM goes as high as 12% interest with current interest rates. They’re like 2 year balloon loans, because the borrower cannot afford the higher payment. If you finance before the 2 year period ends, you’re hit with the prepayment penalty. His main concerns with the subprime product is 1) high debt ratio of 50% – 55% of gross income, 2) underwriting to the initial low interest rate, and 3) payment excludes taxes and insurance, so once you add that in, the total payment is over 60% of income, and once the payment adjusts, the payment exceeds gross income!

When asked about the % of loans with prepay penalties, neither of the mortgage banker association spokesmen had any idea, hahahaha. But the CRL guy cited industry studies showing that 80% of subprime loans have them.

Mr. Allard cited a Colorado homeowner who was hit with a $20,000 prepayment penalty if he refinanced with a different broker.

1.8 million homeowners are at risk of default, and 500,000 will end up in foreclosure, according to the Consumer Federation of America. Most borrowers have no clue about the payment shock.

Senator Jim Bunning admitted that he needed a lawyer to review his refinancing documents, which were 36 pages of legalese. He makes a good point. If not even a senator can make sense of loan documents… I have to admit, they are very difficult to understand, and how many people actually read all their loan docs?