FDIC Chief Speaks Out on Subprime Shakeup and Asks Investors for Assistance
Chairwoman Sheila Bair of the Federal Deposit Insurance Corporation (FDIC) has stepped up to the plate and asked Wall Street investors to work with borrowers with bad credit to help solve the escalating mortgage crisis.
Recognizing the subprime mortgage crisis, Ms. Bair spoke at the annual meeting of The American Securitization Forum in early June. The American Securitization Forum is a trade organization that represents the securities industry.
In her speech Bair pointed out the obvious, that much money is at stake in the mortgage crisis and millions of families stand to lose their homes in foreclosure. She asked investors to be flexible in the restructuring of bad loans and also asked that they shoulder the responsibility for investing in high risk mortgages.
In 2007 there has been a tremendous spike in loan defaults and mortgage foreclosures, mostly affecting Americans with poor credit scores who had no other choice but to take subprime mortgage loans to finance their homes. Predatory lending practices have left many homeowners with mortgages they can't afford to pay and homes which aren't worth as much as the mortgage that is owed.
Many subprime lenders have closed their doors this year. Some have been forced into bankruptcy by the outrageous number of defaults on their mortgage loans. Don't feel too bad for them though; they made these risky loans that were bound to get homeowners into financial trouble, often leaving them upside-down in their bad mortgages. It was inevitably a lose-lose situation.
Large financial institutions are also feeling the squeeze of subprime lending defaults. Many have sold their subprime mortgage divisions, while others have reduced their subprime lending dramatically.
Bair was straightforward in asking investors who buy mortgage-backed securities to work with lenders to keep homeowners out of foreclosure. She asked that investors give lenders the flexibility to make changes and adjustments to loans that are in danger of default. If mortgage lenders are able to assist homeowners by making modifications to their loans, more Americans would be able to keep their homes and avoid foreclosure.
In March, the FDIC worked together with the four other federal agencies that regulate banks, thrifts and credit unions to come up with proposed guidelines for lending practices. These guidelines promote more consumer protection and more rigid underwriting policies to ensure that homeowners can pay their mortgage payments and not end up as foreclosure statistics in the coming years.
Bair hopes that Congress and the Federal Reserve will also work to require non-bank lenders to also up their standards and practices to the same level. Such requirements would put a halt to predatory, fraudulent and abusive lending practices.
Tightening practices and raising standards for subprime mortgages across the board would be a step in the right direction for lenders to lower the default rate on mortgage loans and reduce the foreclosure epidemic in the United States.