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THE
subprime mortgage market is largely a mystery to most of
the public, and to many of the public officials trying
to find ways to mitigate the damage done to borrowers
caught up in it.
There’s
plenty that can be done to protect borrowers in the
future, including establishing meaningful oversight of
independent mortgage brokers not affiliated with a
financial institution or a subsidiary of one. Such
brokers got large fees for putting homebuyers into
mortgages they couldn’t afford—though some of the
borrowers assumed they would be bailed out by
ever-rising home prices.
Helping
owners already faced with the possibility of foreclosure
requires knowing how the problems developed, which is
why Eric S. Rosengren, president of the Boston Federal
Reserve Bank, initiated a project to gather data on the
subprime market in New England and what has happened to
the people who used such mortgages.
The
other 11 regional Fed banks would do well to follow
Boston’s lead.
What the
Boston Fed researchers have found so far has convinced
Rosengren that many of the troubled homeowners may
qualify for a prime loan that could be profitable for
community banks in the region if they are willing to go
after the business.
For
instance, they found that borrowers getting such
mortgages last year in Middlesex County, Massachusetts,
paid an average initial interest rate of 8.35 percent.
Teaser
rate
That was
a so-called teaser rate because the combination of the
index and the spread that determine the rate the
borrower pays was even higher, about 9.5 percent. That,
of course, was far above the 6.4-percent average last
year for conventional 30-year fixed-rate mortgages.
Rosengren released the data analyzed so far in a speech
yesterday in Portland, Maine. As the analysis
progresses, it will be made public, in part to assist
state and federal officials who also want to assist
owners in danger of losing their homes.
In
Middlesex County, which stretches from Cambridge and
Watertown north to the New Hampshire border and west for
miles, more than one-fourth of recent subprime
foreclosures have involved multifamily dwellings,
according to publicly available data at state registries
of deeds.
“This
highlights a potentially serious problem for tenants,
who may not have known that the owner might be in a
precarious financial position,” Rosengren said.
High
credit scores
More
positively, the researchers also found that almost
two-thirds of borrowers in the county who got subprime
mortgages had FICO credit scores above 620, which
normally would have qualified them for a prime mortgage.
“And 18 percent had scores over 700,” he said.
“They
may have been in subprime products because they chose to
make a highly leveraged home purchase, or they may have
been steered to a more costly mortgage for which they
might have otherwise qualified,” Rosengren said. “Either
way, it is encouraging to note that these borrowers
could be in a position to refinance to another product.”
Even
though home prices are falling in parts of
New England, as they are in many other areas, many subprime
mortgage holders have been in their homes long enough
that they may have enough equity to allow them to
refinance into a prime loan. In some cases, simply
having made their mortgage payments will also have
improved their credit scores.
With the
rates on subprime loans so much higher, “if these
borrowers could qualify for a prime product they would
likely see a significant reduction in their interest
rate,” Rosengren said.
Aggresive brokers
Part of
the underlying problem is that banks and thrift
institutions largely ceded the subprime market to the
aggressive, unregulated brokers. The brokers sought
potential clients wherever they could find them. Most of
the financial institutions usually sat back and waited
for buyers to seek them out.
Not that
all of the subprime borrowers were blameless for their
plight. It’s quite clear that many were extracting
equity as their homes appreciated.
Yet, of
the subprime mortgages originated between 1999 and 2004,
two-thirds were paid off within two years and almost 90
percent within three years, Rosengren said.
“While
some of those sales may have been under difficult
circumstances, it is plausible that many borrowers who
purchased homes with subprime products did benefit from
the appreciation of home prices in
New England that occurred over the last decade,” he said.
The data
from the Boston Fed shows the very mixed picture in the
subprime market. Yes, foreclosures are up, though with
timely action by borrowers and financial institutions,
many owners potentially in difficulty should be able to
hold on to their homes.
Based on
the details about subprime borrowers the Fed research
has unearthed, the bankers and banking organizations
with which Rosengren has been meeting should realize
there may be an opportunity here to make a buck and do
some good in the process. |
