Lenders asked to work with Borrowers

By MARTIN CRUTSINGER, Associated Press
Posted Wednesday, September 5, 2007Read Comments-->09/05/2007 -->
WASHINGTON -- The Federal Reserve and other banking regulators issued special guidance Tuesday urging loan service companies to work with borrowers in danger of defaulting on their home mortgages.
The new guidelines are not mandatory, but the regulators expressed the hope that companies that collect payments on mortgages would heed the advice.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., said that mortgage collectors have the authority under accounting and tax rules to help deserving borrowers.
"More and more consumers with subprime and hybrid mortgage products are facing the very real prospect of losing their homes through foreclosure as their payments reset and become unaffordable," she said in a statement. "It is vital that mortgage servicers work proactively with borrowers facing much higher payments as their interest rates reset."
The banking regulators' guidance issued by the Fed and the other agencies followed President Bush's announcement Friday that his administration was putting forward proposals aimed at preventing defaults expected in the next two years as the housing industry goes through a serious downturn.
The effort by Bush and the banking agencies is an attempt to deal with growing anxiety as more and more homeowners worry about losing their homes because they can no longer meet the mortgage payments.
An estimated 2 million adjustable-rate mortgages are scheduled to reset by the end of 2008, going from low introductory interest rates to higher rates.
Already there has been a rising number of defaults of subprime mortgages, loans that were extended to borrowers with weak credit histories. Those rising defaults have roiled financial markets in recent weeks as investors have worried about whether the credit markets will be destabilized by a rising tide of bad loans.
The problem facing many homeowners with adjustable-rate mortgages is that those mortgages are now resetting at higher interest rates that in some cases are causing their monthly payments to double or even triple.
The guidelines were aimed at addressing the fact that, in many cases, the company in charge of collecting monthly mortgage payments is not the same company that originated the loan.
The guidance said that appropriate strategies to ward off defaults could include modifying the terms of the loan or deferring payments. Those modifications could include converting the loan from an adjustable-rate loan, one in which the interest rate resets at periodic intervals, to a fixed-rate mortgage, which would keep the monthly payments from going higher.
Other possible modifications would include extending the length of the loan and rolling the amount of payments that the borrower has missed into the total loan amount that must be paid off.