Banking regulator sees more U.S. mortgage defaults
WASHINGTON (Reuters) - Defaults are increasing among U.S. homeowners with good, but not perfect, credit histories who obtained a non-traditional mortgage, a top U.S. banking regulator said on Friday.
More pain can be expected as for both borrowers with poor credit, who hold subprime mortgages, and borrowers with good credit, who hold Alt-A mortgages, see their interest rates reset, Federal Deposit Insurance Corp Chairman Sheila Bair said in prepared remarks for a speech in California's Silicon Valley.
The Alt-A loan is generally made to borrowers who have good, but less than perfect credit histories and may involve less documentation of income and assets.
Bair, who has been pushing banks and loan servicers to modify home loans, said new rules are needed to protect all homeowners and end compensation plans for brokers who steer borrowers into unaffordable mortgages.
About 85 percent of borrowers with payment-option loans, one type of Alt-A mortgage, now owe more than they did at the time of origination, she said. About 75 percent are making the minimum payment.
"The problems associated with these products are already evident," Bair said. "We're seeing a rash of 'first-year defaults' among Alt-A loans to speculators and borrowers who should never have been qualified for the loan in the first place."
Bair has warned that a wave of loan problems involving prime borrowers looms next year because about $600 billion of nontraditional mortgages were issued to prime borrowers in recent years.
Nontraditional mortgages flourished after 2003, thanks to easy credit and double-digit home price increases in some markets.
Bair and other banking regulators say one of the causes of the subprime mortgage mess stems from nonbank lenders that flew under regulatory radar while criteria to get a loan were lowered.
She also said a recent proposal by the Federal Reserve Bank to amend the Truth-In-Lending rules, which apply to advertising and disclosure of interest rates and terms, are an important first step forward.
"The home mortgage market needs strong rules," Bair said.
"We need rules that apply across-the-board so they protect all homeowners, regardless of who their lender is, or what state they live in," she said. "We need rules that apply to banks and nonbanks alike."
(Reporting by John Poirier; Editing by Dave Zimmerman, Leslie Gevirtz)
