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Banking regulator sees more US mortgage defaults

WASHINGTON – Defaults are increasing among US homeowners with good, but not perfect, credit histories who obtained a non-traditional mortgage, a top US banking regulator said on Friday.

More pain can be expected as both borrowers with poor credit, who hold sub-prime mortgages, and borrowers with good credit, who hold Alt-A mortgages, see their interest rates reset, Federal Deposit Insurance Corp Chairman Sheila Bair said in prepared remarks for a speech in California’s Silicon Valley.

The Alt-A loan is generally made to borrowers who have good, but less than perfect credit histories and may involve less documentation of income and assets.

Ms Bair, who has been pushing banks and loan servicers to modify home loans, said new rules are needed to protect all homeowners and end compensation plans for brokers who steer borrowers into unaffordable mortgages.

About 85 per cent of borrowers with payment-option loans, one type of Alt-A mortgage, now owe more than they did at the time of origination, she said. About 75 per cent are making the minimum payment.

‘The problems associated with these products are already evident,’ Ms Bair said. ‘We’re seeing a rash of ‘first-year defaults’ among Alt-A loans to speculators and borrowers who should never have been qualified for the loan in the first place.’

Ms Bair has warned that a wave of loan problems involving prime borrowers looms next year because about US$600 billion of nontraditional mortgages were issued to prime borrowers in recent years.

Non traditional mortgages flourished after 2003, thanks to easy credit and double-digit home price increases in some markets.

Ms Bair and other banking regulators say one of the causes of the sub-prime mortgage mess stems from non-bank lenders that flew under regulatory radar while criteria to get a loan were lowered.

She also said a recent proposal by the US Federal Reserve Bank to amend the Truth-In-Lending rules, which apply to advertising and disclosure of interest rates and terms, are an important first step forward.

‘The home mortgage market needs strong rules,’ she said. ‘We need rules that apply acrossthe-board so they protect all homeowners, regardless of who their lender is, or what state they live in. We need rules that apply to banks and nonbanks alike.’

Source: REUTERS (Business Times 23 Feb 08)

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