In the Monday News Bin

Each day, I run across a few news items on which I want to make a few comments on the blog. Awaiting for the moment when I have a lot of time to do an extended analysis, these items typically languish in my e-mail inbox and then eventually get deleted. Rather than let these items suffer the same fate:

• On Friday (June 29), the federal banking regulators issued an interagency statement about their expectations for underwriting standards for so-called hybrid adjustable rate mortgages (ARMs). The regulating agencies were the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration. As banking regulators, these agencies collectively have a regulatory interest in ensuring that lenders do not overextend themselves in making risky loans to bank customers. Perhaps the most important item was the agencies' statement that they expect lenders to qualify borrowers for loans based on the "fully-indexed" rate for the loan. "Fully-indexed" is the technical term for the rate after the teaser period is over. In other words, it's not enough that the borrower qualifies for the two-year low teaser rate, but that the borrow qualify for a loan based on the higher rate that will apply later.
• Paul Krugman has a column in today's (July 2) New York Times ($) about the complicity of the rating agencies and regulators in making securitized subprime loans look less risky than they really were. Krugman writes, "But the securities were never as safe as advertised, because the risk transfer wasn’t anywhere near big enough to protect investors from the consequences of a burst housing bubble." It's worth a read.

That's all for now.