Feds To Help Out On Subprime Lending

The Federal Reserve recently decided to use a public hearing to gain more knowledge about the current state of mortgage lending business. The aim is to cut down on lending abuses. Fed Governor Randall Kroszner said their main purpose is to gather information on how to make rules in future to stop fraud and abusive practices, ensuring that it does not create more problems for qualified consumers who deserve home loans.

Currently subprime mortgages are extended to borrowers with poor credit histories at high interest rates. Default rates in the subprime segment of the U.S. mortgage market have jumped as the housing industry has slowed and prices have fallen and the spread of its woes to other areas of the economy has been widely feared.

At least 20 lenders in the subprime mortgage sector have gone out of business as a result. Some large lenders have been badly hit as well, such as Bank of America (BAC) and Countrywide Financials (CFC)

Some U.S. lawmakers have criticized the Fed for failing to take steps it could have taken to avoid unfair or abusive lending practices.

The subprime crisis has triggered broader concerns that the fallout may spread to mainstream lenders and damage the economy. It also has led to a debate over whether legislation will be required to address this issue.

Fed enforcement under the act would apply to both bank lenders as well as non-bank institutions that do not answer to federal banking regulators but who have been supplying a growing share of mortgage loans.

In other news home foreclosures in May jumped 90% from a year earlier, reflecting a poor spring housing market. The May foreclosures totaled 176,137, up 19% from April.

Mortgage Applications Take A Dip

U.S. mortgage applications declined recently due to reduced demand for home refinancing. Refinancing took a hit due to higher long-term interest rates.

The Mortgage Bankers Association's mortgage application index slipped 1.7%. A rise in applications to buy homes was overshadowed by the drop in refinancing applications. The Mortgage Bankers Association's purchase index rose 1.5%, but home refinancing fell 6.1%.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, rose 0.03% point to average 6.35%. Refinancing represented 38% of total mortgage applications, down from 39.7% the prior week.

On a four-week moving average, which smoothes out volatility, all three of the Mortgage Bankers Association's seasonally adjusted indexes have fallen. The mortgage applications index, also called the market index, is down 2.1%; the purchase index is off 0.3% and refinance index is down 4.3%.