The Federal Reserve and other banking regulators issued special guidance Tuesday urging loan service companies to work with borrowers in danger of defaulting on their home mortgages.
The guidelines are not mandatory, but the regulators expressed hope that companies that collect payments on mortgages would heed the advice.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., said mortgage collectors have the authority under existing accounting and tax rules to help deserving borrowers.
“More and more consumers with subprime and hybrid mortgage products are facing the very real prospect of losing their homes through foreclosure as their payments reset and become unaffordable,” Bair said in a statement. “It is vital that mortgage servicers work proactively with borrowers facing much higher payments as their interest rates reset.”
The banking regulators’ guidance issued by the Fed and other agencies followed President Bush’s announcement Friday that his administration was putting forward proposals aimed at preventing defaults expected over the next two years as the housing industry endures a serious downturn.
The effort by Bush and the banking agencies is an attempt to deal with growing anxiety as more and more homeowners worry about losing their homes because they can no longer pay the mortgage.
An estimated 2 million adjustable rate mortgages are scheduled to reset by the end of 2008, going from low introductory interest rates to higher rates.
Already there have been a rising number of defaults of subprime mortgages, loans that were extended to borrowers with weak credit histories. Those increasing defaults have roiled financial markets in recent weeks as investors worried about whether the credit markets will be destabilized by a rising tide of bad loans.
The problem facing many homeowners with adjustable-rate mortgages? Those mortgages are now resetting at higher interest rates that in some cases are causing monthly payments to double or even triple.
The guidelines were aimed at addressing the fact that in many cases the company in charge of collecting monthly mortgage payments is not the same company that originated the loan.
The guidance said appropriate strategies to ward off defaults could include modifying the terms of the loan or deferring payments. Those modifications could include converting the loan from an adjustable rate loan, one in which the interest rate resets at periodic intervals, to a fixed-rate mortgage that would prevent the monthly payments from rising.
Other possible modifications would include extending the length of the loan and rolling the amount of payments the borrower has missed into the total loan amount that must be paid off.
“Reworking these loans will achieve long-term sustainable obligations to provide stability to borrowers, investors and the marketplace,” Bair said.
Democrats who have criticized the administration’s handling of the foreclosure problem said more must be done.
“Today’s statement by the financial regulators comes very late and only underscores the failure of this administration over a period of years to protect homeowners from predatory lending practices,” said Senate Banking Committee Chairman Christopher Dodd, D-Conn.
Sen. Charles Schumer, D-N.Y., said it was a good move to get federal regulators to jawbone lenders and banks to help families get out of bad subprime mortgages. But he said more federal resources must be devoted to helping local nonprofit groups that specialize in providing counseling to prevent foreclosures.
“These groups are effective mediators between the private sector and families who need loan modifications,” said Schumer, who has won Senate Appropriations Committee approval for an additional $100 million to support foreclosure prevention counseling.
The joint statement encouraged the mortgage servicing companies to consider referring borrowers in trouble to qualified homeownership counseling services.
Fed Governor Randall Kroszner said the joint guidance was meant to encourage the companies that collect payments on mortgages packaged into certain debt securities and sold in debt markets to “reach out to financially stressed homeowners.”
“Keeping families in their homes is a matter of great importance to the Federal Reserve,” said Kroszner, one of the Fed board members who has taken the lead in dealing with the mortgage crisis.
In addition to the Fed and the FDIC, which insures deposits at financial institutions, the other groups who issued the statement were the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration and the Conference of State Bank Supervisors.