Iowa Banking Law Blog

Iowa Ranks 4th in Nation in Subprime Foreclosures, 9th in Overall Foreclosures

According to a report by the Mortgage Bankers Association, Iowa ranks fourth in the nation in subprime foreclosure rate, with a rate of 8.63% (of Iowa loans).  Iowa ranks ninth in total foreclosure rate with 1.65% (of Iowa loans).  In an article on ABC's Ottumwa affiliate website the president of the Iowa Bankers Mortgage Corporation said that most of these subprime loans were given out by brokers and national institutions. 

In response to this growing problem, Attorney General Tom Miller announced an ititiative to assist borrowers facing foreclosure and to encourage loan modification between lender and borrower.  The project will feature a Foreclosure Hotline borrowers can call for assitance.  Miller stated that 50% of people foreclosed upon never contact their lender to attempt to avoid foreclosure.  It is his hope that this initiative will increase communication between lenders and borrowers and decrease the rate of foreclosures by guiding borrowers through the maze that can be created when the originating party transfers the loan to another party, who may then sell the loan further down the line or have another company service the loan. 

This effort meshes very well with the guidance issued by the federal regulators (discussed here).  The Attorney General and the regulators seem to understand that it is not community banks causing this problem, but brokers and other less regulated entities.  Hopefully, Congress will see this as well.

Regulators Issue Statement on Avoiding Losses Associated with Securitized Mortgages

The federal banking regulators (the FDIC, Federal Reserve, OCC, OTS, and NCUA), along with the Conference of State Bank Supervisors (CSBS) issued a statement encouraging regulated institutions that service mortgage loans to employ certain "loss mitigation techniques" that would preserve homeownership.  The statement is a follow-up to the April 2007 Statement on Working with Mortgage Borrowers and the July 2007 Statement on Subprime Mortgage Lending.  Unlike these previous statements, which urged prudent workout arrangements, the new statement is focused on mortgage loans that have been transferred into securitization trusts. 

The regulators state that when faced with an increased risk of default, servicers of loans should: contact the borrower and assess their ability to repay, assess whether default is reasonably foreseeable, and explore, where appropriate, a loss mitigation strategy that avoids foreclosure, such as loan modifications, payment deferral, conversion into fixed rate, and capitalization of delinquent amounts.

In considering loss mitigation techniques, the statement urges services to consider the borrower's income, debt, and housing related expenses.  Servicers are also urged to refer borrowers to government programs, non-profits, and counseling services that could assist the borrower.  The statement claims that "loss mitigation techniques" that preserve homeownership are less costly than foreclosure. 

This guidance was issued as political pressure to address the mortgage industry mounts.  Presidential candidates have increasingly integrated mortgage and foreclosure issues into their agendas.  President Bush threw his hat in the ring last week by announcing that his administration would put forth proposals to prevent some expected defaults over the next two years.

Unfortunately, this regulatory statement may not stem the congressional tide to over-regulate the industry.

Subprime Lineage

          The reports of a recent depositor run at the Countrywide Bank in California may reveal an emerging shortcoming in comfort with the industry's FDIC insurance.  See article in Atlantic Journal-Constitution.  This new phenomena of undifferentiated fear may be the result of the increasingly complex and intertwined system of financial products confronting and confusing investors.  An insightful analysis of this growing customer anxiety and the potential inability or unwillingness of bank customers to differentiate the "insured" financial product from the uninsured financial instrument can be found in the Op-Ed column by Paul Krugman of the New York Times available here (subscription required). 

          Whether more regulation, or simply more common sense, is needed to deal with the recent credit events, Barney Frank, Chair of the U.S. House Financial Service Committee believes in and is urging more federal intervention.  See Financial Times article.  Mr. Frank calls for regulation of mortgage brokers, guidelines for securitization of mortgages, and a total reevaluation of the regulation of financial markets.