Federal Deposit Insurance Corp. Chairman Sheila Bair called for payments on most subprime mortgages to be fixed at current levels.
Lenders should extend “teaser” rates on all subprime adjustable-rate mortgages if the borrowers haven’t missed any payments and they live in the homes, Bair said today in New York. Modifying loans on a case-by-case basis and fixing rates for limited periods won’t avert enough foreclosures, she said.
Sheila Bair is a woman after my heart and she echoes what I have been saying all along.
Bair said her modification plan would be best for mortgage- bond investors, even though it would reduce interest payments by most borrowers. She said loan servicers don’t have the resources to review each loan and that they may default later anyway if their payments aren’t fixed permanently. Lenders generally have granted extensions for between six months and five years.
“In today’s housing market you can’t make the assumption that they’ll have enough equity in five years” to refinance, Blair said.
About 100,000 subprime mortgages a month will reset to higher rates for the first time during the next two years, according to UBS AG analysts led by Laurie Goodman. Rates on the loans typically are fixed for as long as three years, and can then climb every six months. Borrowers’ payments usually jump about 30 percent to start, Bair said.
Subprime adjustable-rate mortgages with a few years of fixed rates, or hybrid ARMs, were offered because lenders believed borrowers would refinance into new loans or sell their properties, Bair said.
“Let’s be honest about it: Hybrid ARMs were never made on the assumption that borrowers could continue to pay them back once the loans reset,” she said.