November 19, 2007

As the current mortgage crisis continues to escalate, two million families are expected to lose their homes (“U.S. property values may suffer $223 billion hit in foreclosures,” Business, Nov. 14). But in many communities throughout the Chicago region, the damage from years of irresponsible underwriting standards and abusive lending has already been done.

Hybrid adjustable rate loans, also called 2/28s or 3/27s, offered borrowers a low introductory rate for the first two or three years, then raised rates, often dramatically, for the remainder of the loan term. The result was a payment that often went from barely affordable to unaffordable, sometimes overnight.

In an attempt to prevent similar crises in the future, Congress is at last debating substantive reforms about the way the mortgage industry should be regulated. But the current crisis demands bold and imaginative action immediately to prevent a worse crisis in the home mortgage and financial markets. Unfortunately, the general response from the lending industry has been self-protective and grossly inadequate, and the response from the regulators has been cautious to the point of culpability.

However, one national regulator has issued a call for action that gets at a significant slice of the problem. FDIC Chairwoman Sheila C. Bair has proposed that loan servicers and investors cooperate to develop a systematic approach to loan modification that would freeze the interest rates of a large number of troublesome 2/28 and 3/27 adjustable-rate mortgages at their starter rates, which, as the chairman points out, are high enough to begin with.

Make no mistake about it, this crisis was caused by the financial services industry with grossly lax underwriting standards and deceptive marketing. Of course, the servicers and investors will take a hit from freezing rates. But the hit they will take if they act now is nothing compared to the hit they will take from a deepening crisis if they choose to do nothing.

Some companies claim that they have already acted boldly to restructure loans, but recent Moody’s data show that only 1 percent of adjustable-rate loans have been restructured. Moreover, within many financial services companies there is little communication between collection departments and workout departments, so they often act at cross-purposes.

Although a number of steps need to be taken to protect homeowners facing the complex problems of foreclosure, Chairman Bair has recognized the magnitude of the situation and placed responsibility where it belongs: on financial institutions that lost control of their own products.

Malcolm Bush

Chicago