Wednesday, June 13, 2007

Lenders are adopting federal guidelines

General Electric’s WMC Mortgage and Merrill Lynch’s First Franklin Financial are adopting the federal underwriting guidelines proposed in March. Lenders will have to determine the borrowers’ ability to make fully-indexed monthly payments instead of the initial, smaller payments at “teaser” interest rates. For many subprime borrowers, this will mean cutting off or limiting credit, but it’s probably better than putting them into a mortgage they cannot afford to repay. A large part of those who took adjustable-rate loans in recent years wouldn’t have qualified had the lenders taken into account the full monthly payments, scheduled to kick in two or three years down the road. No wonder we see a spike in delinquencies and foreclosures. The bad news is, economists say even more foreclosures are to be expected as ARMs begin adjusting later this year and in 2008.

The Fed is still considering steps to prevent “predator” lending and encourage “responsible” loan providers, but a number of economists are skeptical. “Bailing out” troubled borrowers would mean paying with taxpayers’ money for other people’s foolish and irresponsible financial decisions, instead of letting them bear the consequences of assuming too much risk. Plus, the market is already casting out lenders who were all too willing to provide junk loans, and the rest are tightening underwriting standards. In the months and years to come, fewer loans will be originated, so there will probably be fewer buyers house-hunting out there. Sounds like a nasty housing slump to me.

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