At a hearing today, FDIC Chairwoman Sheila Bair told the House Financial Services Committee that 1.5 million homeowners would be unable to make their mortgage payments when their loans reset in the coming months.
Bair is referring to the many low start-rate option-arms and adjustable-rate mortgages that were en vogue over the past few years.
When these loans reset, or become adjustable, mortgage rates will skyrocket, and some homeowners may find themselves with a huge payment increase that may become unmanageable.
For many this payment shock will likely lead to default and possible foreclosure unless the government irons out a feasible plan to save homeowners with emergency refinancing.
Undersecretary of Treasury for Domestic Finance Robert Steel said the government would continue to work with banks and lenders to restructure mortgages to avoid further defaults.
The problem however, is will a refinance be enough to save homeowners who have no business owning a home to begin with?
John Dugan, Comptroller of the Currency, expressed some positive news, noting that more borrowers are going with fixed-rate mortgages, while lenders are stepping up guidelines and requiring more thorough loan documentation.
So moving forward, there should be a decline in payment defaults because the pre-screening process is improving industry-wide.
The FDIC also noted that debt-to-income ratios over 50% increased the likelihood of delinquencies or defaults, and that underwriting guidelines should be further restricted to combat this issue.
Blair noted that the FDIC is monitoring banks exposed to subprime, but felt that the large part of the problem didn’t occur within the banks.
Good for the banks, bad for all the wholesale mortgage lenders who will shoulder the burden and likely shutter as a result.