Weighing restraints on loans

By Jonathan Peterson

Feb. 24, 2007 12 AM PT

Times Staff Writer

WASHINGTON —

As more Americans default on home loans, federal regulators and members of Congress are looking to place new restrictions on mortgages for people with shaky credit, a move that could make it harder for many people to buy homes or refinance their mortgages.

Government officials are weighing several proposals to address problems that have rattled the mortgage lending industry -- heavily concentrated in Southern California -- and left growing numbers of people in homes they cannot afford.

These measures include requiring that such loans be granted only to those who have the ability to make payments for the entire mortgage, rather than just an initial period that has a “teaser” rate that is guaranteed to shoot up, typically adding hundreds of dollars to the monthly payment.

Another proposal would ensure that consumers get enhanced disclosures about their loans, so that fees and rate hikes do not catch them by surprise.

Regulators, under pressure from Democratic lawmakers, are trying to put together new guidelines on the high-cost loans, which were conspicuously omitted from a recent regulatory statement on untraditional mortgages.

“We think additional guidance is necessary to address abuses in the market,” Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency, said this week. “But we also want to be careful not to impose a regulatory standard that goes too far” and freezes out worthy borrowers, he added.

The issue has emerged as growing numbers of borrowers with “sub-prime” mortgages -- loans designed for people with weak credit or erratic income -- fall behind on their payments.

Sub-prime lenders have seen their share values torpedoed in recent weeks. On Friday, shares of mortgage lenders tumbled after H&R; Block Inc. reported a day earlier that it would be setting aside $111 million to cover losses by its Option One sub-prime unit based in Irvine.

Shares of Irvine-based New Century Financial Corp. fell $1.02 to $15.52. Countrywide Financial Corp. of Calabasas, which makes both prime and sub-prime loans, dropped 81 cents to $39.33.

There also have been growing signs of pressure on individual borrowers who were enticed into such mortgages by terms that seemed appealing but became onerous as their monthly payments shot up and home values fell.

The matter has proved troubling for officials because the high-cost loans have helped make homeownership possible for millions of people with credit problems or limited finances. Such loans have soared in usage in recent years.

“The challenge for regulators is to firm up standards without cutting off credit to the people who need it most -- especially first-time home buyers and minority borrowers,” said Howard Glaser, a mortgage industry consultant and former U.S. housing official. “Striking that balance could prove elusive.”

Sen. Christopher J. Dodd (D-Conn.), the Senate banking committee chairman who is running for president, is pushing regulators to ensure that lenders enhance disclosures in such loans and limit them to borrowers who can make payments for the life of the loan, and not just the low-cost teaser period at the beginning.

“Sen. Dodd believes that it is patently unfair to offer vulnerable sub-prime borrowers fewer protections than those offered in the prime market, especially when data has shown black and Hispanic families are disproportionately borrowing in the high-cost sub-prime market,” Dodd spokesman Marvin Fast said.

At the same time, he added, the senator “strongly believes that it is vitally important that we encourage homeownership.”

Rep. Barney Frank (D-Mass.), chairman of the House banking committee, has been hammering at the same theme and seeks to pass a law to stop predatory lending. His committee will hold hearings within the next few months aimed at producing a bill that would ensure that borrowers in the high-cost market have adequate protections.

The politicians are not likely to stop anytime soon. Victims of predatory lending can tell heart-wrenching tales, a reality that was on display at a Senate hearing this month.

Delores King, a Chicago retiree, recalled how a telemarketer lured her into a mortgage refinance. At the time, she had a monthly payment of $798. Her new loan, which started out at $832, has since adjusted to $1,488 a month. “This is more than my entire monthly income,” she told lawmakers.

Amy Womble said she was home in North Carolina when a pop-up ad on her computer stirred her interest, and she contacted the company. A gross misunderstanding ensued.

Womble said she thought that she was agreeing to a fixed monthly payment of $927, but ended up with a payment of $2,147, scheduled to rise to $2,528 after two years -- with a final “balloon payment” of $176,070. “Now I am worried about losing my home, my sons’ home, the home my [late] husband and I worked so hard for,” she told Dodd’s panel.

Such tales have caught the attention of regulators. Lenders say the horror stories can obscure the fact that high-cost loans help make homeownership possible to people who might otherwise not qualify for a mortgage.

“The danger here is that, in an ultimately ironic fashion, the very people you’re trying to help are the ones you hurt the most,” said Kurt Pfotenhauer, senior vice president with the Mortgage Bankers Assn.

Much of the current flap is focused on the 80% of sub-prime loans that come with a low, two-year introductory rate, then may adjust 30% to 40% higher.

Many of these loans come with expensive prepayment penalties -- meaning the homeowner must pay thousands of dollars when forced to refinance to avoid the unaffordable high payments. To top it off, sub-prime lenders often approve these loans without considering whether the borrower can actually afford the loan when scheduled payment increases occur, or without even documenting the amount of the borrower’s income.

In September, with concerns growing about exotic new home loans, government financial regulators advised lenders to make sure that fee disclosures were adequate, and that borrowers were approved based on their ability to repay the full loan, rather than just make payments during the low initial period.

But in a noteworthy omission, the officials’ advisory statement did not appear to include other kinds of sub-prime mortgages. During Capitol Hill appearances this month, Federal Reserve Chairman Ben S. Bernanke was pressed by Dodd and Frank on the matter, and responded that new guidelines were under consideration by a group of federal agencies.

It is not clear what the next regulatory development will be, but officials are under pressure to raise standards for qualifying borrowers and disclosure requirements so people are not surprised by cost increases that are built into their loans. Consumer activists are urging that such measures require that mortgage brokers have a fiduciary duty to watch out for their clients’ best interest. They want agencies such as the Federal Reserve and Federal Trade Commission to strengthen their enforcement efforts against predatory loans.

Another proposal, pushed by the Center for Responsible Lending, is for regulators to impose a flat “ability to repay” standard for all sub-prime loans.

jonathan.peterson@latimes.com

Times staff writer E. Scott Reckard in Los Angeles contributed to this report.

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Top lenders

Here are the largest sub-prime mortgage lenders and their share of the U.S. market in 2006.

Wells Fargo, San Francisco: 13.0%

HSBC Holdings, London: 8.3

New Century Financial, Irvine: 8.1

Countrywide Fin., Calabasas: 6.3

CitiGroup, New York: 5.9

WMC Mortgage, Burbank*: 5.2

Fremont General, Santa Monica: 5.0