Industry News

Price declines will determine extent of subprime crisis

Boston Fed study finds link between appreciation, defaults

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The foreclosure crisis will "get worse before it gets better," but just how bad depends on how far house prices fall, the president of the Federal Reserve Bank of Boston said today. In a speech based on a new study of subprime lending in Massachusetts, Boston Fed chief Eric Rosengren encouraged lenders to extend the loan terms of qualified borrowers facing interest rate resets or help them refinance into fixed-rate loans. Rising home prices and "abundant" financing helped 71 percent of subprime borrowers who took out 2/28 adjustable-rate mortgage (ARM) loans in 2004 to "retire" them by refinancing them before their interest rates reset, Rosengren said. The percentage was even higher in New England, Rosengren said, where 74 percent of subprime 2/28 ARM loans were retired in two years, and 93 percent in three years. By contrast, 12.4 percent of subprime ARM loans are seriously delinquent today. The problem isn't so much that the loans reset to higher interest rates, Rosengren maintains...