Housing Decline to Continue: Fed Governor

The problems of the subprime mortgage market could get worse before they get better, Federal Reserve Board Governor Randall Kroszner told attendees at the Consumer Bankers Association’s Fair Lending Conference in Washington, D.C., on Monday.

“All indications are that housing activity is continuing to weaken,” Kroszner said. “Incoming data in recent weeks show that sales and new residential construction have declined further. In such an environment, house prices in the aggregate are likely to remain sluggish for some time.“

Another shoe yet to drop on the subprime market is the build of resets for adjustable rate mortgages. Many were sold using below-market teaser rates as the basis for approving the loan. Now, many of those loans are readjusting to much higher market rates – and many of the borrowers cannot make the sharply higher payments.

“On average, in each quarter from now until the end of next year, monthly payments for more than 400,000 subprime mortgages are scheduled to undergo their first interest rate reset,” Kroszner said. “That number is up from roughly 200,000 per quarter during the first half of 2007. Delinquencies and foreclosures are therefore likely to continue to rise for a number of quarters.”

The tactic of refinancing such loans, which had enabled many borrowers to avoid financial problems in the past is not an option for many in the subprime arena because many of the lenders have gone under or shut down their subprime programs and other sources of funds have dried up, Krozner said.

"It is imperative that we work together as a financial services community to look for ways to help borrowers address their mortgage challenges, particularly those who may have fewer alternatives, such as lower-income families. Toward this end, the Federal Reserve’s Community Affairs Offices have been convening lenders, community leaders, and government officials around the country over the past two years to help identify strategies to provide resources to assist borrowers confronting foreclosure,” said Kroszner.