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We have found no evidence that fixed-rate mortgages, for example, were difficult to obtain during the early 1990s when GSE portfolios were small. Indeed, the share of adjustable-rate mortgage originations averaged slightly more than 20 percent in 1992, when GSE portfolios were small, and averaged 34 percent in 2004, when GSE portfolios were large; these data suggest that the size of the GSEs’ portfolios is unrelated to the availability or popularity of fixed-rate mortgages. As far as we can tell, GSE mortgage securitization, in contrast to the GSE’s portfolio holdings, is the key ingredient to maintaining and enhancing the benefits of the GSEs to homebuyers and secondary mortgage markets. And mortgage securitization, unlike the GSE portfolio holdings, does not create substantial systemic risks.
In summary, we found the following:
AMP lending tripled over a 3-year period, and many borrowers were using interest-only or payment-option adjustable-rate products to purchase homes in high-priced markets. AMP lending has been concentrated in the higher-priced regional markets on the East and West Coasts in states such as California, Washington, Virginia, and Maryland.
Lenders may have increased risks to themselves and their customers by relaxing underwriting standards and through “risk-layering”, which includes combining AMPs with less stringent income and asset verification requirements or lending to borrowers with lower credit scores and higher debt-to-income ratios. However, it is too early to determine the extent to which high foreclosure rates will result or whether lenders will be affected.
From 2003 through 2005, AMP lending grew rapidly, with originations increasing threefold from less than 10 percent of residential mortgages to about 30 percent. Most of the originations during this period consisted of interest-only ARMs and payment-option ARMs, and most of this lending occurred in higher-priced regional markets concentrated on the East and West Coasts. For example, based on data from mortgage securitizations in 2005, about 47 percent of interest-only ARMs and 58 percent of payment-option ARMs were originated in California, which contained 7 of the 20 highest-priced metropolitan real estate markets in the country. On the East Coast, Virginia, Maryland, New Jersey, and Florida as well as Washington, D.C., exhibited a high concentration of AMP lending in 2005. Other examples of states with high concentrations of AMP lending include Washington, Nevada, and Arizona. These areas also experienced higher rates of home price appreciation during this period than the rest of the United States.
In addition to this growth, the characteristics of AMP borrowers have changed. Historically, AMP borrowers consisted of wealthy and financially sophisticated borrowers who used these specialized products as financial management tools. However, today a wider range of borrowers use AMPs as affordability products to purchase homes that might otherwise be unaffordable using conventional fixed-rate mortgages.
Although regulatory officials have expressed concerns about AMP risks and underwriting practices, they said that banks and lenders generally have taken steps to manage the resulting credit risk. Federal and state banking regulatory officials and lenders with whom we spoke said most banks have diversified their assets to manage the credit risk of AMPs held in their portfolios, or have reduced their risk through loan sales or securitization. In addition, federal regulatory officials told us that while underwriting trends may have loosened over time, lenders have generally attempted to mitigate their risk from AMP lending. For example, OCC and Federal Reserve officials told us that most lenders qualify payment-option ARM borrowers at fully indexed rates, not at introductory interest rates, to help ensure that borrowers have financial resources to manage future mortgage increases, or to pay more on their mortgages than the minimum monthly payment. OCC officials also said that some lenders may mitigate risk by having some stricter criteria for AMPs than for traditional mortgages for some elements of their underwriting standards.
Discussions of the potential threat posed by the prevalence of nontraditional mortgages have been prominent in the last year. As of September 2005, adjustable rate mortgages (ARMs) accounted for roughly 70% of the prime mortgage products originated and securitized and 80% of the subprime sector.1 CRL commends the federal Agencies for the proposed guidance that they have issued with regard to nontraditional mortgages and concurs with many of the concerns they have raised on this topic. At the same time, while the Agencies have focused on products such as interest-only mortgages and option adjustable-rate mortgages (ARMs) originated by the entities they regulate, we urge the regulators and this Committee to broaden the scope of concern. Specifically, we encourage regulators to apply the same concerns to subprime finance companies that are not covered by the existing proposed guidance, and to address abuses in hybrid ARM lending in addition to those found in interest-only and option ARM products.
Subprime lending is not a small problem that affects only a few homeowners—one in every four home loans originated in 2005 was a subprime loan, a sector that has $1.2 trillion of mortgages currently outstanding.2 The vast majority of these loans are hybrid ARMs with a short initial period that offers an artificially low mortgage payment, followed by a significant payment shock for the borrower when the rates reset. Because many subprime lenders fail to consider whether the borrower will be able to afford the mortgage payment after the ARM adjusts, families with these loans are likely to face increasing rates of foreclosure and will lose significant accumulated equity in the coming years. And the impact will not only be on the families that lose their homes. In 2005, subprime originators made 4,225,426 loans totaling $671.8 billion.3 Our national economy is at significant risk if these loans fail in great numbers, as I fear they will.
So they marginalized their own risks.
Didn't work.
One can blame de-regulation all they want, but the bottom line is no one in their right mind is going to lend too much to someone that can't afford it unless there is something else to gain, or their being forced to do so.
When housing prices reach the point where sales dip to almost nothing, the real estate gang can only do one thing to keep their income growing - crash the market and start all over. Homeowners and investors take the hit and the slow escalation of housing prices starts all over again.
The desire to crash the market came in a nice little package called increasing profits.
Everyone looks past the entire governments role, in general, and looks along party lines. These GSE's were created to help lower interest rates and make mortgages affordable. They setup a system where these entities could spread securities throughout the market and intrinsically throughout the world. Now this might have happened without these entities it was spread much faster through subsidies from the Federal Government which led to, pretty much, a monopoly in which no competitors could keep things in check. Although it could be argued that without these huge entities there would have been no way to regulate the private sector effectively.
tell me what the democrats have done since they have been in charge for 3 years now? where is the reform on their side. any thinking person would realize that both parties are contributory to this wiping out of the middle class. what we have to do is get the democrats in power to stop hurting the middle class now, through wars and health care cuts. (to fund the illegal immigrants that they plan on loading into the system):
I share your frustration that the Democrats still haven't cleaned up the GOP's horrible mess. But I'm afraid the brutal truth is that it's going to take some time to repair the damage.
Quote:
Republicans Fight To Spare Medicare From Cuts, Dems Confront Overhaul's Affordability Issues
The Washington Post: For Republicans "(i)t's a lonely battle. The hospital associations, AARP and other powerful interest groups that usually howl over Medicare cuts have also switched sides. Last week, they stood silent as the Senate Finance Committee debated a plan to slice more than $400 billion over the next decade from Medicare, the revered federal insurance program for people over 65, and Medicaid, which also serves many seniors."
the bottom line is that the outside party is trying to stop the big government of the inside party, and so it goes.....
Aren't you the least bit curious why the "hospital associations, AARP and other powerful interest groups that usually howl over Medicare cuts have also switched sides" leaving the GOP so all alone?
And now the Democrats are retaliating by ignoring the Republicans.
Petty fighting in Congress rather than true bi-partisan collaboration to come up with bills that contain the give and take of both parties to produce a final bill that is amenable to the majority of Americans.
They are like a bunch of kids in a schoolyard fighting over who gets to play in the sandbox depending on what party is currently in power. They are totally disregarding what their petty bickering is doing to America.
But is the "Circling of the Wagons" by both parties, caused by "citizen involvement" or "corporate involvement". Somebody is turning them all into a bunch of headless chickens.
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