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HERE ARE SOME OF THE HIGHLIGHTS:

“In recent years, the subprime market has grown dramatically, enabling more and more borrowers to obtain credit who traditionally would have been unable to access it.

“The growth of this market is well recognized. Also well recognized are the problems that have arisen with these changes. The Board believes that responsible subprime lending has an important role to play in expanding credit to traditionally underserved borrowers. IT ALSO RECOGNIZED, HOWEVER, THAT SOME OF THE LENDING UNDERTAKEN IN RECENT YEARS WAS NEITHER RESPONSIBLE OR PRUDENT.

“. . . . some borrowers whose mortgage balances exceed their house values may be tempted to walk away from their loans. Borrowers who purchased properties solely for investment purposes may be more likely to default in this situation; INDEED, THE MORTGAGE BANKER’S ASSOCIATION HAS FOUND A DISPROPORTIANTE SHARE OF SERIOUS DELINQUENCIES ARE ASSOCIATED WITH NON-OWNER OCCURPIED PROPERTIES IN SOME OF THE STATES WITH THE HIGHEST INCREASES IN DELINQUENCIES.

“A recently released study by the Federal Reserve Bank of Boston attributes most of the recent rise in foreclosures in Massachusetts to declining house prices.2

“Over a quarter of homeowners report that their houses decreased in value over the past year, just a bit above the level last seen in the early 1990s.1 These price changes will affect homeowners’ abilities to resolve financial troubles by refinancing their mortgages or pulling equity out of their homes, and may lead to increased defaults.

“Borrowers who have lost their jobs, not surprisingly, may have difficulty meeting their mortgage payments. Thus, increases in unemployment in certain areas, such as states in the Midwest struggling with job cuts in the auto industry, are another major factor contributing to higher delinquency rates.

“The final major factor explaining the current increase in delinquency rates is the APPARENT DETERIORATION IN UNDERWRITING STANDARDS beginning in late 2005. An increasing number of subprime loans were made with layers of additional risk factors, such as a lack of full documentation or very high loan-to-value ratios. Much of this weakening in underwriting standards happened outside of institutions regulated by the federal banking agencies. In addition, prior to late 2005, high demand for housing and rising house prices allowed borrowers to recover from these risks through profitable home sales and refinancings, HIDING THE WEAKENED UNDERWRITING STANDARDS FROM VIEW.

“The slowdown in house prices, coupled with shifts in underwriting standards, are the most likely explanation for the pronounced rise we have seen in defaults occurring within a few months of origination, before most borrowers would have experienced significant changes in their payment obligations or in their financial situations.

“Looking forward, we expect the substantial payment increases often experienced at the first interest-rate reset to result in higher delinquencies.

“If the benefits of homeownership are to be realized, we believe that homeownership must be sustainable and that access to responsible lending be available for consumers. To achieve this, the Board believes that there must be appropriate consumer protection and responsible lending to traditionally underserved borrowers.

“. . . enforcement of consumer protection laws and regulations is critical

“As I will discuss further in a moment, we support these efforts (LOAN MODIFICATION) because foreclosure is generally the worst possible option for CONSUMERS, INVESTORS AND COMMUNITIES AND SHOULD BE AVOIDED WHENEVER OTHER VIABLE OPTIONS EXIST.

“Changes to existing terms, however, should not be made lightly, should be consistent with safe and sound lending practices, and should not be made when they are only delaying losses to investors and consumers. In short, we should pursue sustainable solutions.

“The Board recognizes, however, that improved disclosures are necessary BUT NOT SUFFICIENT to address the problems. In addition to these actions, therefore, the Federal Reserve will exercise its rulemaking authority under the Home Ownership and Equity Protection Act (HOEPA) to address UNFAIR OR DECEPTIVE mortgage lending practices. At the same time we propose the TILA rule changes on advertising and timing of disclosures, we will issue, for public comment, significant new rules that would apply to subprime loans offered by all mortgage lenders.

“we are looking closely at practices in the subprime mortgage market, such as prepayment penalties, failure to offer escrow accounts for taxes and insurance, stated-income and low-documentation lending, and the failure to give adequate consideration to a borrower’s ability to repay.

“The Mortgage Reform and Anti-Predatory Lending Act of 2007, which was passed by the House of Representatives last month, would extend additional oversight and consumer protections to the market.

“A second issue is the possible imposition of civil money penalties when the enforcement agencies find that there is a pattern or practice of violations. Penalties collected would be used to establish a trust fund for those consumers whose interests had been harmed but who lack a remedy in the event, for instance, that the responsible party has gone out of business.