Bies Says Subprime Defaults Are `Beginning of Wave'
Enviado: 9/3/2007 21:37Bies Says Subprime Defaults Are `Beginning of Wave' (Update3)
By Alison Vekshin and Anthony Massucci
March 9 (Bloomberg) -- U.S. Federal Reserve Governor Susan Bies said banks' losses from risky home loans made at low introductory rates are just beginning.
Bies, who has been Fed's top banking policy official in her tenure at the U.S. central bank, said today banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.
``What's happening is the front end of this wave of teaser- rate loans that are coming into full pricing,'' Bies said at a risk-management forum in Charlotte, North Carolina. ``So what we're seeing in this narrow segment is the beginning of the wave -- this is not the end, this is the beginning.''
Bies's comments reflect growing attention among bank regulators to the turmoil in the so-called subprime mortgage market and its impact on consumers and U.S. lenders. Many subprime borrowers face large prepayment penalties they can't afford, and they can't refinance or sell their homes, she said.
Bies said regulators are concerned about ``payment shock'' in mortgage loans made to borrowers with weak credit histories whose payments surge after a low introductory period. These subprime adjustable-rate mortgages represent 7 percent of mortgages made in the last few years, Bies said.
U.S. bank regulators have been watching rising numbers of cases of missed payments and defaults in the subprime market since last spring, Bies said.
Tougher Guidelines
The Fed and four other bank regulators released proposed guidelines last week instructing banks to strengthen their underwriting standards and offer clear disclosures on loan terms to subprime borrowers.
The central bank also said last week that the delinquency rate on banks' residential real-estate loans reached a four-year high last quarter.
Bies said the problems in the mortgage market are well- contained.
``We're seeing this in a very narrow segment,'' Bies said. ``We're watching for contagion, we haven't seen it.''
Outside of the housing and auto industries, ``the economy is strong,'' Bies said.
More than two dozen mortgage companies have gone bankrupt, closed operations or sought buyers since the start of 2006, according to data compiled by Bloomberg.
Irvine, California-based New Century Financial Corp., the second-largest U.S. home lender to subprime borrowers, stopped making new loans. Analysts speculate the company may soon file for bankruptcy protection.
Fremont General Corp., a Santa Monica, California-based mortgage lender, said on March 2 that it would sell its subprime mortgage lending operations three days after the Federal Deposit Insurance Corp. notified the company of objections to its subprime lending practices.
Bies spoke on a panel with two chief risk officers from Charlotte-based Bank of America Corp. and Wachovia Corp. She plans to resign from the Fed as of March 30.
By Alison Vekshin and Anthony Massucci
March 9 (Bloomberg) -- U.S. Federal Reserve Governor Susan Bies said banks' losses from risky home loans made at low introductory rates are just beginning.
Bies, who has been Fed's top banking policy official in her tenure at the U.S. central bank, said today banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.
``What's happening is the front end of this wave of teaser- rate loans that are coming into full pricing,'' Bies said at a risk-management forum in Charlotte, North Carolina. ``So what we're seeing in this narrow segment is the beginning of the wave -- this is not the end, this is the beginning.''
Bies's comments reflect growing attention among bank regulators to the turmoil in the so-called subprime mortgage market and its impact on consumers and U.S. lenders. Many subprime borrowers face large prepayment penalties they can't afford, and they can't refinance or sell their homes, she said.
Bies said regulators are concerned about ``payment shock'' in mortgage loans made to borrowers with weak credit histories whose payments surge after a low introductory period. These subprime adjustable-rate mortgages represent 7 percent of mortgages made in the last few years, Bies said.
U.S. bank regulators have been watching rising numbers of cases of missed payments and defaults in the subprime market since last spring, Bies said.
Tougher Guidelines
The Fed and four other bank regulators released proposed guidelines last week instructing banks to strengthen their underwriting standards and offer clear disclosures on loan terms to subprime borrowers.
The central bank also said last week that the delinquency rate on banks' residential real-estate loans reached a four-year high last quarter.
Bies said the problems in the mortgage market are well- contained.
``We're seeing this in a very narrow segment,'' Bies said. ``We're watching for contagion, we haven't seen it.''
Outside of the housing and auto industries, ``the economy is strong,'' Bies said.
More than two dozen mortgage companies have gone bankrupt, closed operations or sought buyers since the start of 2006, according to data compiled by Bloomberg.
Irvine, California-based New Century Financial Corp., the second-largest U.S. home lender to subprime borrowers, stopped making new loans. Analysts speculate the company may soon file for bankruptcy protection.
Fremont General Corp., a Santa Monica, California-based mortgage lender, said on March 2 that it would sell its subprime mortgage lending operations three days after the Federal Deposit Insurance Corp. notified the company of objections to its subprime lending practices.
Bies spoke on a panel with two chief risk officers from Charlotte-based Bank of America Corp. and Wachovia Corp. She plans to resign from the Fed as of March 30.