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House subcommittee looks at Californias bleak subprime picture
WASHINGTON (12/3/07)—The Federal Deposit Insurance Corp. (FDIC) chairman’s special advisor for policy was one of 21 witnesses scheduled to testify on three panels during Friday’s House subcommittee field hearing in California on foreclosure prevention. The FDIC’s Mike Krimminger noted in his prepared testimony that California’s exposure to subprime mortgages is particularly significant and the approaching rate resets for subprime hybrid ARM loans is introducing “additional uncertainty for California homeowners, lenders, and the public.” The hearing was conducted by the House Financial Services subcommittee on housing and community opportunity. Krimminger testified that California’s subprime mortgage problems already have spread to cause other problems, such as a decline in the state’s employment levels, spurred in part by a 16% drop in construction employment as of the third quarter of this year. The non-depository finance and services sector also experienced a decline of 3% from a year ago. Krimminger split subprime loan portfolios into three groups, identifying: a small subset of loans that can be expected to perform after reset without modification; loans that became past due under the starter rate and probably cannot repay even if they are modified; and loans that have remained current prior to reset, but will likely not remain so after reset without modification. Based on FDIC calculations, he said, perhaps more than 1.5 million hybrid loans totaling $330 billion are scheduled for their first rate reset between September of this year and December 2008. H e said “the vast majority of these loans” remain current and fewer than 350,000 are 60 days or more past due. “A key issue is how to address the mortgage loans for owner occupied properties where the borrowers are current on their payments but will not be able to maintain the payments following reset. If servicers do nothing and allow all of these loans to reset to the full contract rate, the result will be the eventual default and foreclosure on hundreds of thousands of additional loans.” The FDIC official reiterated Chairman Sheila Bair’s recommendation that servicers take a “systematic and streamlined approach” to restructuring loans into fixed-rate loans at the introductory rate. He also took on what he called “misconceptions” regarding restructuring loans. For Krimminger’s complete testimony and that of other witnesses, use the resource link below.
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