In an attempt to minimize future foreclosures, three states have warned adjustable-rate borrowers about preparing for upcoming payment adjustments.
The increased usage of nonprime loans, which grew to a 17 percent share from 15 percent last year and 9 percent two years ago, indicates some lenders are taking more risk than in the past, according to an annual study conducted by Benchmark Consulting International in conjunction with the Consumer Bankers Association. The analysis was based on the responses of 39 financial services companies.
"It's clearer now more than ever that the market is experiencing a period of increased volatility," a Benchmark vice president said in the announcement. "Defaults and foreclosures continue to rise, interest rates are higher, and the origination market is shrinking. In order to remain competitive -- in some cases, to even survive -- in this market environment, financial organizations must maximize efficiencies as much as possible.
Certain types of foreclosure counseling, tools and resources can help borrowers and counselors better address default and foreclosure issues, an executive for Springboard Nonprofit Consumer Credit Management told a group attending a discussion on mortgage default and foreclosure. The possible next step is foreclosure prevention counseling, training and education, the group announced.
Hawaii's Division of Financial Institutions warned adjustable-rate mortgage borrowers about potential payment shock and urged them to start preparing for upcoming rate resets -- which are estimated to hit 1 million mortgages nationally this year, the division announced. Concerned that ARM borrowers in nontraditional loans may not fully understand the characteristics of the products, the division's commissioner provided contact numbers for agencies that can provide solutions assistance for struggling borrowers and encouraged servicers to continue taking steps to address problems prior to recasts.
Hawaii's warnings stemmed from the consumer alert and a letter to servicers issued by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, according to Georgia's Department of Banking and Finance, which issued an announcement similar to Hawaii's. "The current challenges facing the residential mortgage industry are cause for serious concern that many" borrowers could struggle to make monthly loan payments, the supervisors and regulators said in the letter they issued to servicers, additionally advising that servicers should continue reminding borrowers when and how much their payments will increase and consider workout arrangements should loans go into default.
In Pennsylvania, Governor Edward G. Rendell also urged ARM borrowers to prepare for potentially significant payment increases, noting that recent research showed that only one-fifth of borrowers who read their mortgage disclosure forms correctly identify the annual percentage rate or the amount due at closing and half couldn't identify the loan amount. The governor additionally said the state wants to require that originators qualify borrowers under the fully-indexed rate and amortized repayment schedule.
"A vast number of homebuyers entered into adjustable-rate mortgages in 2004 and 2005 and the low introductory 'teaser' rates on those loans are beginning to expire," the governor said. "Homeowners with adjustable-rate mortgages should contact their lenders to confirm when, and by how much, their payments will increase."
Consequently, Pennsylvania's Department of Banking forwarded a regulation for consideration by the Independent Regulatory Review Commission that would require mortgage companies to use a simplified disclosure form to advise borrowers of, among other things, adjustable interest rates, balloon payments, prepayment penalties, negative amortization and whether the lender will escrow taxes and insurance for the loan. Companies would also have to evaluate a borrower's ability to repay the loan based on income, fixed expenses and other relevant factors.
"Too many mortgages have been inappropriately sold to people who didn't understand or couldn't afford them," the department said. The proposed regulations "will dramatically reduce the possibility for lenders to knowingly make loans that borrowers cannot afford or don't fully understand."
The Federal Reserve Bank of San Francisco and banking and thrift regulators recently sponsored a six-city event across California, Arizona and Nevada, featuring panel discussions on community impact and response to the "recent crisis" within the mortgage industry. The discussions brought together community housing and fair housing services, counseling agencies, national mortgage lenders and servicers, and a statewide foreclosure prevention task force to explore default and foreclosure demographics, consumer needs, best practices in foreclosure prevention, and available remedies to cover loan losses, according to a news release.