December 3, 2007 WSJ
By RUTH SIMON
Many borrowers with subprime mortgages have reasonably good credit and may be able to refinance into a less costly mortgage by taking advantage of government programs, Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech this morning.
Pulling from research conducted by members of the bank's staff, Mr. Rosengren noted that 55% of subprime adjustable-rate mortgages, where the owner occupied the home, hadn't missed a mortgage payment in the past year. That translates to about 1.2 million borrowers.
"These subprime borrowers may meet the credit standards required for FHA [Federal Housing Administration] guarantees or for similar state programs, with potentially a significant savings," Mr. Rosengren said in his speech, delivered in Boston at a breakfast sponsored by the Massachusetts Institute for a New Commonwealth. In addition, half of borrowers nationally -- and 71% of those in New England -- had "reasonable credit scores" of above 620 when they took out their mortgage. (Read the full speech.)
FHA is a division of the U.S. Department of Housing and Urban Development that insures loans originated by banks and other companies. FHA was designed to provide insurance for first-time homebuyers and low- and middle-income borrowers, but the program became less popular as subprime and exotic mortgage products developed over the last decade. Mr. Rosengren suggested that lack of knowledge of these programs may have kept borrowers away.
Moreover, Mr. Rosengren said research by the Boston Fed shows that 20% of borrowers with subprime ARMS nationally -- and 26% of these borrowers in New England -- should be able to "relatively easily" refinance into a prime mortgage or a loan guarantee program. At the time they took out their original loan, these borrowers had credit scores above 620, at least 10% equity in their homes, provided full documentation of their income and assets and said they planned to live in the home.
The analysis by the Boston Fed looked at loans that were packaged into securities and sold to investors.
Mr. Rosengren's speech comes among increasing concern about borrowers who face higher monthly payments because the rate on their subprime adjustable-rate mortgage will rise -- or reset. As much as $362 billion in subprime home mortgages with adjustable interest rates are due to reset at a potentially higher rates in the coming year, according to Banc of America Securities. The fear is that many of these borrowers won't be able to afford these higher rates and will be unable to refinance because of tighter lending standards and falling home prices.
Government officials are pushing mortgage companies to freeze interest rates on certain subprime loans. Details of that plan still are under discussion. Mr. Rosengren declined to comment on the specifics of the administration's plan, noting that it hadn't been finalized. But in his speech, he urged lenders to extend the teaser rate "or refinance borrowers into fixed-rate loans wherever possible."
Mr. Rosengren also called on lenders to expand their efforts to refinance these subprime borrowers and to take a "fresh look" at the FHA program. "Banks may not have viewed this market as an engaging opportunity when mortgage brokers were aggressively going after the business, but banks may now find profitable lending opportunities in the current environment."
In addition, Mr. Rosengren said that it "probably makes some sense" for FHA to raise the maximum amount it will finance in certain high cost markets above the current $363,000 level for single-family homes and called on the agency to streamline its appraisal and approval process and beef up outreach to borrowers and lenders. He also suggested that state programs, which have traditionally focused on first-time home buyers, should increase their efforts to refinance borrowers with subprime loans.
In an interview, Mr. Rosengren urged borrowers to seek out lenders who offer FHA loans. "Part of the problem is that it is not that straightforward to find a lender that is an FHA lender," he said. "Borrowers do have to look around." In many cases, borrowers who received a subprime loan "may have been better off with an FHA product," where rates are often two percentage points or more below the rates on subprime loans. The FHA program provides for financing to borrowers who have as little as 3% equity and doesn't require a minimum credit score.
Many borrowers with subprime ARMs were paying relatively high mortgage rates even before their loan reset, Mr. Rosengren said. Nationally, the average rate on a so-called 2-28 loan, which carries a fixed-rate for two years and then resets annually, was 8%.
By RUTH SIMON
Many borrowers with subprime mortgages have reasonably good credit and may be able to refinance into a less costly mortgage by taking advantage of government programs, Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech this morning.
Pulling from research conducted by members of the bank's staff, Mr. Rosengren noted that 55% of subprime adjustable-rate mortgages, where the owner occupied the home, hadn't missed a mortgage payment in the past year. That translates to about 1.2 million borrowers.
"These subprime borrowers may meet the credit standards required for FHA [Federal Housing Administration] guarantees or for similar state programs, with potentially a significant savings," Mr. Rosengren said in his speech, delivered in Boston at a breakfast sponsored by the Massachusetts Institute for a New Commonwealth. In addition, half of borrowers nationally -- and 71% of those in New England -- had "reasonable credit scores" of above 620 when they took out their mortgage. (Read the full speech.)
FHA is a division of the U.S. Department of Housing and Urban Development that insures loans originated by banks and other companies. FHA was designed to provide insurance for first-time homebuyers and low- and middle-income borrowers, but the program became less popular as subprime and exotic mortgage products developed over the last decade. Mr. Rosengren suggested that lack of knowledge of these programs may have kept borrowers away.
Moreover, Mr. Rosengren said research by the Boston Fed shows that 20% of borrowers with subprime ARMS nationally -- and 26% of these borrowers in New England -- should be able to "relatively easily" refinance into a prime mortgage or a loan guarantee program. At the time they took out their original loan, these borrowers had credit scores above 620, at least 10% equity in their homes, provided full documentation of their income and assets and said they planned to live in the home.
The analysis by the Boston Fed looked at loans that were packaged into securities and sold to investors.
Mr. Rosengren's speech comes among increasing concern about borrowers who face higher monthly payments because the rate on their subprime adjustable-rate mortgage will rise -- or reset. As much as $362 billion in subprime home mortgages with adjustable interest rates are due to reset at a potentially higher rates in the coming year, according to Banc of America Securities. The fear is that many of these borrowers won't be able to afford these higher rates and will be unable to refinance because of tighter lending standards and falling home prices.
Government officials are pushing mortgage companies to freeze interest rates on certain subprime loans. Details of that plan still are under discussion. Mr. Rosengren declined to comment on the specifics of the administration's plan, noting that it hadn't been finalized. But in his speech, he urged lenders to extend the teaser rate "or refinance borrowers into fixed-rate loans wherever possible."
Mr. Rosengren also called on lenders to expand their efforts to refinance these subprime borrowers and to take a "fresh look" at the FHA program. "Banks may not have viewed this market as an engaging opportunity when mortgage brokers were aggressively going after the business, but banks may now find profitable lending opportunities in the current environment."
In addition, Mr. Rosengren said that it "probably makes some sense" for FHA to raise the maximum amount it will finance in certain high cost markets above the current $363,000 level for single-family homes and called on the agency to streamline its appraisal and approval process and beef up outreach to borrowers and lenders. He also suggested that state programs, which have traditionally focused on first-time home buyers, should increase their efforts to refinance borrowers with subprime loans.
In an interview, Mr. Rosengren urged borrowers to seek out lenders who offer FHA loans. "Part of the problem is that it is not that straightforward to find a lender that is an FHA lender," he said. "Borrowers do have to look around." In many cases, borrowers who received a subprime loan "may have been better off with an FHA product," where rates are often two percentage points or more below the rates on subprime loans. The FHA program provides for financing to borrowers who have as little as 3% equity and doesn't require a minimum credit score.
Many borrowers with subprime ARMs were paying relatively high mortgage rates even before their loan reset, Mr. Rosengren said. Nationally, the average rate on a so-called 2-28 loan, which carries a fixed-rate for two years and then resets annually, was 8%.
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