Riskier U.S. home loans fell in 2007: regulators

By David Lawder

WASHINGTON (Reuters) - Home loans to higher-risk borrowers fell sharply in 2007, as did some riskier practices such as layering "piggyback" mortgages to finance home purchases, U.S. regulators said in a report on Thursday.

In addition, loans to minorities decreased at a sharper rate than loans to white borrowers, the report by the Federal Financial Institutions Examination Council found.

The report of loan data under the Home Mortgage Disclosure Act showed that lenders pulled back from riskier lending practices that fed the housing boom in prior years.

Mortgage delinquencies rose sharply in 2007 as adjustable-rate loans began to reset to higher interest rates, launching a subprime loan crisis and credit crunch that eventually shook the financial system to its foundations.

"One consequence of deteriorating loan performance and widespread declines in home values was a sharp contraction in 2007 in the willingness of lenders and investors to offer loans to higher-risk borrowers or, in some cases to offer to certain loan products that entailed features associated with elevated credit risk," the Federal Financial Institutions Examination Council said in the report.

Reported mortgage applications in 2007 fell 22 percent from 2006 to 21.4 million, while reported loan originations fell by 25 percent to 10.4 million, according to the report.

Mortgages originated to minorities fell more sharply, with extensions of home purchase loans to Hispanic whites down 49 percent and to African-American borrowers down 35 percent. Home purchase loans to whites fell 22 percent while loans to Asians fell less than whites, according to the report.

Lenders also made fewer loans to borrowers with undocumented income in 2007. Lending to borrowers with "missing income" declined 69 percent in 2007, a much bigger drop than loans to borrowers whose income was reported, according to the report.

PIGGYBACK FALL-OFF

The use of so-called "piggyback" loans to stretch a borrower's down payment and income to afford a higher-priced house -- a common practice during the housing boom earlier in the decade -- fell sharply in 2007.

Such piggybacking involves a junior-lien loan that allows a first-lien loan to conform to Fannie Mae (FNM.N) and Freddie Mac (FRE.N) limits, affording a lower interest rate. The junior lien is often a higher priced loan but can allow borrowers with smaller down payments to avoid the cost of private mortgage insurance, helping to reduce monthly payments.

In 2007, lenders reported only 600,000 junior-lien loans to purchase homes, a decline of 58 percent from the 2006 level of 1.43 million loans. In 2005, lenders reported that 1.37 million junior-lien loans were used to purchase homes.

"Piggyback loans have contributed to the current mortgage market difficulties," the regulators said, because they allowed borrowers to minimize their cash contributions. "Borrowers in these circumstances are much more likely to default than those with an equity stake in the property."

The Federal Financial Institutions Examination Council is overseen by the Federal Reserve, Federal Deposit Insurance Corp., National Credit Union Administration, Office of the Comptroller of the Currency, and Office of Thrift Supervision.

(Reporting by David Lawder; Editing by Leslie Adler)