Lenders should restructure adjustable- rate mortgages before rising payments push them into default, Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., urged Monday.
“We need to deal with this,” Bair said. “Short term, we need to have some flexibility.”
Bair was in Denver on Monday to address the annual conference of the National Community Tax Coalition, a group that seeks to improve the economic well- being of low- and moderate-income households.
Adjustable-rate mortgages worth a record $50 billion are scheduled to reset to higher payments this month. Those resets could result in many families losing their homes.
A lack of equity or prepayment penalties make it difficult to refinance many of those loans before they adjust to payments that are out of reach.
Bair called on lenders to convert those adjustable rate loans to fixed rate when borrowers have stayed current for several years.
Contractual agreements and a lack of experience in dealing with large-scale defaults on the newer type of loan products have limited lenders, said Zachary Urban, director of housing counseling with Brother’s Redevelopment in Denver.
Mortgages are typically pooled into large groups to spread out risk. But pooling also makes it harder to get the numerous parties on the same page.
For example, some loan pools allow changes in terms on five out of 100 loans. While lenders will work with delinquent borrowers on a case-by-case basis, they have resisted blanket amnesties to head off problems.
“Banks and servicers and lenders need the moral support of the government to say it is OK to go down that road,” Urban said.
So far, Colorado’s high foreclosure rate has not damaged the state’s banking sector, which typically held to more conservative standards in making home loans.
“Colorado’s banks have been very healthy and very profitable,” Bair said.
Although some large banks invested in securities backed by mortgage debt, the FDIC hasn’t found that a problem at the smaller institutions it regulates, Bair said.
That isn’t to say there aren’t problems.
Citigroup, the nation’s largest bank, said Monday that its third-quarter profits would drop 60 percent after it took $3 billion in write-offs related to mortgage- backed securities and to loans funding leveraged buyouts.
And on Friday, the Office of Thrift Supervision closed NetBank, a struggling online bank based in Georgia, after it suffered high loan defaults.
EverBank said it will acquire about $700 million worth of mortgage assets of the failed Internet bank, while ING Bank will take over the insured deposits.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
