KEY POINTS:
Federal Reserve Governor Randall Kroszner says conditions for US sub-prime mortgage borrowers may get worse because house prices will probably stay "sluggish" into next year.
"Conditions for sub-prime borrowers have the potential to get worse before they get better," Kroszner said. He cited data showing declines in sales, which are suppressing house prices, and the likelihood of higher mortgage costs as low introductory rates expire.
Kroszner urged mortgage lenders and loan servicers to develop a systematic effort to head off foreclosures. He also reiterated the Fed's plan for new mortgage rules, adding that there was "no reason" lenders shouldn't be forced to include escrows of tax and insurance payments.
"It is very important for lenders and servicers to come together and try to think about systematic solutions," Kroszner said in response to a question. Loan servicers typically collect and distribute payments after mortgages have been pooled into bonds. "Trying to come up with a systematic solution is very valuable."
The Fed has been blasted by lawmakers in Congress who accused the central bank of lax enforcement and foot-dragging on rules to protect consumers. Lending standards fell and abuses rose during the biggest mortgage boom in American history from 2004 to 2006, as Americans borrowed US$2.88 trillion in new home loans over the three-year period.
Fed Chairman Ben Bernanke pledged to lawmakers earlier this year that the central bank would refine mortgage-lending rules and define mortgage affordability before year-end.
- Bloomberg
