Federal regulators and consumer advocates laid out their plans to help mitigate rising foreclosures.
Regulators are now encouraging federally regulated and state-supervised entities that service securitized loans to fully review pooling and servicing agreements and pursue loss mitigation strategies whenever possible.
The push comes as numerous subprime and other mortgage loans have transferred from the entities' balance sheets to securitization trusts that are governed by pooling and servicing agreements, according to a statement issued Tuesday by the Federal Deposit Insurance Corp., Federal Reserve Board, Office of the Comptroller of the Currency, Office of Thrift Supervision, National Credit Union Administration, and Conference of State Bank Supervisors.
The regulators emphasized that the governing agreements may allow servicers of securitized loans to contact borrowers at risk of default or in advance of loan resets, determine whether default is reasonably foreseeable, and then apply loss mitigation strategies.
Recommended loss mitigation techniques included loan modifications, deferral of payments, reduction of principal, or conversion of adjustable-rate mortgages into fixed-rate or fully-indexed, fully amortizing loans. Regulators also encouraged servicers to refer appropriate borrowers to qualified homeownership counseling services.
In determining borrowers' ability to repay a modified loan through maturity, servicers were additionally advised to consider the borrowers' debt-to-income ratio and avoid ratios above 50 percent because the likelihood of future difficulties in repayment and delinquencies or defaults increases, according to a supplemental announcement by the FDIC, CSBC, and the American Association of Residential Mortgage Regulators.
"This supplemental information provides a benchmark for servicers to consider when working with borrowers to modify loans that will be sustainable in the long term," said FDIC Chairman Sheila Bair in the statement.
In addition to an analysis of borrowers' debt ratios, which should include their total monthly housing-related payments as a percentage of their gross monthly income, attention should also be given to other obligations, resources and factors that could affect capacity to repay.
"This guidance will be an important consumer protection tool for state mortgage regulators to use in the coming months," said AARMR David Bleicken in the separate announcement.
Meanwhile, the Association of Community Organization for Reform Now is planning its own fight against the subprime foreclosure crisis by rallying outside the offices of a leading hedge fund company that refuses to make modifications on subprime loans.
Members of the consumer advocacy group located on the West Coast will travel to the hedge fund's headquarters in Irvine, Calif., while East Coast members will show up at the parent company in Greenwich, Conn. Members and foreclosure victims will carry blown-up photographs of homes and families and demand solutions.
ACORN said it wants subprime servicers to replace their current practice of offering unaffordable payment plans to low- and moderate-income delinquent borrowers with a policy of offering sustainable loan modifications based on a borrower's income and ability to repay; contact adjustable-rate mortgage borrowers at least 120 days before a scheduled rate reset to determine whether they will be able to afford the new payments and, if not, offer to lock-in the initial interest rate for the remaining loan term; and place any impending foreclosures on hold for 30 days if the borrower has started working with a HUD-approved non-profit housing counseling agency.
ACORN contends that brokers and loan officers steer borrowers into subprime ARMs, which comprise over three-quarters of subprime loans originated in recent years. The group said it has interviewed hundreds of subprime ARM borrowers and that none were given a choice about whether they wanted a fixed or adjustable rate, many who specifically asked for a fixed rate were instead given an ARM, and many were not aware they had an ARM until their payments rose.
Though the foreclosure crisis is perceived to be the result of lending to borrowers with bad credit histories, a study showed subprime borrowers able to qualify for fixed-rate loans were often convinced by brokers to take out unaffordable loans, ACORN reported.
ACORN announced that its Foreclosure Exposure: A study of racial and income disparities in home mortgage lending in 172 American cities additionally showed that, while high-cost and subprime mortgages became more prevalent for all borrowers over the past decade, minorities -- regardless of income -- received a much higher percentage of high-risk loans, particularly ARMs.
African-American and Latino home purchasers were respectively 2.7 and 2.3 times more likely to be given a high-cost loan than were whites, ACORN reported. In refinances, the racial disparity was lower, with minorities less than two times more likely to receive high-cost loans than whites.
The 10 metropolitan areas most at risk were found to be Memphis, Tenn.; Springfield, Ill; Birmingham, Ala.; Jackson, Miss.; Detroit and Flint, Mich.; McAllen, El Paso, Brownsville and Laredo, Texas. Plus, there was eight metro areas where homebuyers in minority neighborhoods were at least five times more likely than borrowers in white neighborhoods to receive a high-cost loan: San Francisco, Oakland, San Jose, Santa Ana and Los Angeles, Calif.; Bridgeport, Conn., Richmond Va.; and Newark, N.J.
ACORN's study reportedly analyzed Home Mortgage Disclosure Act data from a sample of 363 lenders that are estimated to represent close to 70 percent of 2006's residential originations and over 50 percent of the subprime market.