The sharp decline of the subprime housing market offering high-cost mortgages hasn’t yet hit bottom, the head of home mortgage buyer Freddie Mac said Friday.
The number of home buyers starting such loans peaked last year, and interest rates for those buyers are due to rise in the next few years, which could cause foreclosures to spike further, Richard F. Syron said in an interview with The Associated Press.
“I don’t think it’s troughed yet, because of the class of 2006,” Syron, chairman and chief executive of Freddie Mac, said before speaking at a housing conference. “The mortgages written in 2006 in the subprime market are probably the most troublesome. They haven’t hit the reset point yet on interest rates.”
Subprime mortgages that became increasingly popular in recent years are considered higher-risk loans because they typically draw borrowers in with an initial low “teaser” interest rate, which can spike upward after the first few years.
Until the housing market entered its current slump, many such borrowers could avoid falling behind on payments by refinancing to loans with increasingly lenient terms. Such refinancing spared banks from getting stuck with sour loans, as long as prices rose.
“To some extent, people in the past thought, ’Well, I’ll be bailed out by the rise in housing prices, no matter what happens,”’ Syron said.
But when prices began dropping in many markets in late 2005, borrowers’ options became fewer as banks tightened lending requirements, pushing more people into default and many into eventual foreclosure. The problems could worsen as nearly 2 million so-called adjustable-rate mortgages ARMs are resetting to higher rates this year and next.
“People are already worried about what the reset rate is going to be, and they weren’t in the past,” Syron said.
McLean, Va.-based Freddie Mac, the nation’s second-largest buyer and guarantor of home loans, said last week it would buy as much as $20 billion in mortgages to help borrowers with high-priced loans stay in their homes.
The government-sponsored company, along with No. 1 mortgage financier Fannie Mae, are developing new types of loans to help homeowners avoid default. Starting sometime this summer, consumers meeting the program’s lending criteria will be able to obtain fixed-rate mortgages and adjustable-rate mortgages with longer fixed-rate periods before resetting to higher rates.
On Friday, Syron said the programs could only do so much to ease the crisis many subprime borrowers face.
“It would be extreme hubris to think that we’re going to greatly diminish the process,” he said in the interview. “These steps are focused on helping individual people, and it will help the market. But once you get one of these market dynamics going, you don’t reverse them without it taking some time .... They’ve got to play themselves out.”
In his subsequent speech to the “Housing Boston 2012” conference, Syron warned against relying too heavily on the home finance industry to tailor solutions to housing market problems such as affordability.
“The finance side can only do so much,” Syron said.
“Our big problem in cities like Boston ... is the (housing) supply side. We’re never going to solve the housing affordability problem unless we face that.”
Policy makers should more closely examine whether zoning restrictions and land-use policies are too strict to allow more affordable housing, and many residents of established neighborhoods should examine why they frequently back such restrictions, he said.
“You can’t say you’re in favor of affordable housing if you want stricter zoning, if you want all kinds of conditions on development,” Syron said.
Syron, who grew up in Boston and was president of the Federal Reserve Bank of Boston from 1989 to 1994, was named in December 2003 to head Freddie Mac.
Freddie Mac and Fannie Mae were created by Congress to pump money into the home-mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street.