Released: October 19, 2007

Fix rates to save loans

Source: Shiela C. Bair* [New York Times] (Free Registration)

There have been many proposals to deal with the problems in the mortgage market. But the best place to begin is by looking at the poor lending standards and weak consumer protections at the root of the problem — in particular, the troubling loans called 2/28 and 3/27 subprime hybrids. They have starter interest rates of 7 percent or more for the first two or three years, and “resets” that raise rates to as much as 12 percent, causing monthly payments to increase by at least 30 percent. When housing prices were rising, borrowers could sell or refinance their homes to pay off the loans before reset and avoid crippling monthly payments. But this year, as prices have dropped, more than $150 billion in these loans have undergone reset, and an additional $300 billion will do so before the end of 2008. [*Sheila C. Bair is the chairman of the Federal Deposit Insurance Corporation.]

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