Senate Banking Committee Video on Non-traditional Mortgages

[powayseller]

Senate Hearing Video.

Thanks to Paper Money for taping the C-SPAN2 aired hearing.

[powayseller]

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_such_reality]

Yeah but… the IRS is unleashing Private Debt Collectors to collect back taxes that get to keep 25% of the proceeds… link

[powayseller]

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?

[PD]

I think the complexity of loan docs is a huge problem. People with finance degrees have a hard time understanding the math. I think a significant number of people don’t even try and rely on their mortgage broker to spell it out for them. The mortgage broker, however, just wants to get the borrower’s name on the bottom line so they can get paid. The borrower ends up looking at just one number – the initial payment.

[CAwireman]

“When it Hits”

When one chairman asked this question: what happens when “it hits” * the answers were very evasive. (agreeing
with PS)

Paraphrasing:
“The numbers are low right now…but they might be higher
later”

The Chair persons asked tough questions of the regulators but let them off pretty easily.

*ARMs reset en masse and people are upside down.

Sarbanes asked about the sustainability of the whole process and accountability (bank makes loan and sells it off)as well as validating the borrowers ability to handle the loan: Answers were – “we concur, the new guidelines will fix everything. No real problems here”.

You know, based upon the senate hearing, I think we’re okay. We should ask Rich to shut down the site and do something more productive with his time. ;- )

[powayseller]

These hearings pointed out that subprime borrowers are at the greatest risk of foreclosure due to exotic lending. These loans have been targeted at the less educated, lower-income folks, usually minorities. Whereas only 10% of prime loans have a prepayment penalty, over 80% of subprime loans have a prepayment penalty.

The subprime borrowers have to time their refinancing just right: if they do it one month before their 2 year teaser period expires, they incur steep prepayment penalties (often 6 months interest). If they refinance after their 2 year teaser period ends, they get hit with a payment shock, where the new payment can actually exceed their gross income.

Furthermore, as I explained above, subprime borrowers are qualified for principal and interest at a 55% debt ratio on the intial teaser rate! Now add taxes and insurance, and in year 3 add the higher payments due to the end of the teaser rate + add the higher interest rate that is in effect now, and you’ve got a person in foreclosure. One of the regulators said a loan payment like that can TRIPLE.

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