Released: July 07, 2007

Subprime lenders are on notice

Source: Kenneth Harney, Washington Post (Free Registration)

It won’t mean the end of high-risk mortgages for subprime home buyers, but new guidance from federal financial regulators will almost certainly cut sharply the availability of some such loans.

In a policy statement June 29 on loans to borrowers with imperfect credit histories, federal financial regulators urged banks, credit unions and their mortgage subsidiaries to verify the income, assets and employment of all borrowers, except when borrowers can show that they have substantial financial reserves.

The guidelines also say lenders should underwrite adjustable-rate subprime mortgage applicants at the “fully indexed” interest rate, not at a deeply discounted teaser rate. During the housing boom, many lenders lured credit-impaired home buyers into “2/28” and “3/27” adjustable-rate mortgages, with discounted fixed payments for the first two or three years.

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