Housing advocates said it leaves millions of struggling borrowers at risk of foreclosure.
Though the details are somewhat complicated, the plan essentially streamlines the loan modification and refinancing process for borrowers at risk.
"Higher credit risk borrowers will be the most compelled to draw down on their revolver availability now, versus take the risk the commitments fail to be funded in the future, " says Chris Taggert, an analyst at CreditSights.
Although, he admits, higher premiums for higher risk borrowers presents both positives and negatives.
Easy credit could put corporate borrowers at greater risk of default, but even now, distressed debt investors are recouping far more than they have in previous years.
As of February, nearly one in 10 reverse-mortgage borrowers were at risk of foreclosure as a result of failing to pay real-estate taxes and insurance.
WSJ: Rethinking Reverse Mortgages, Part 2: Pitfalls and Dangers
Those firms able to distinguish among, say, high-risk and low-risk borrowers on an individual basis will eventually win out over those who use crude and discriminatory proxies.
This was mostly the result of loans to low-income, higher-risk borrowers.
But bank loans typically have a much shorter maturity, thus exposing borrowers to the risk of having to negotiate new loans at a higher cost in the future.
Worse, nearly 10 percent of reverse mortgage borrowers were at risk of foreclosure due to non-payment of taxes and insurance as of February, 2012, according to the CFPB report.
FORBES: Reverse Mortgages Fall Short of Their Potential, Says a New Government Report
The usual disciplines in banking are lost in China to a desire to protect the ruling party's hold (and stifle upheaval) by fostering employment at what are often bad-risk borrowers.
Fees imposed on high-risk borrowers of up to 2% of the mortgage amount have been reduced or eliminated, and applicants in many cases no longer need a new property appraisal.
Paulson tells Robert Siegel that the Treasury Department and Department of Housing and Urban Development will work with mortgage companies, financial counseling groups and other nonprofits to determine at-risk borrowers and contact them in advance to offer help refinancing.
The alternative is for all the high-risk borrowers to turn to credit unions, leaving credit unions with no choice but to jack up interest rates for those with low credit scores, which would compensate them for the risk but render the legislation useless.
"The bond-market investigation is not likely to have a negative impact on companies' ability to raise funds in the short term, but some high-risk borrowers, such as local-government financing vehicles, could see their borrowing costs go up, " said Zhu Chaoping, head of research at ChinaScope Financial, a Hong Kong research and data firm.
It also says the three ignored the warnings of a company risk officer that the underwriting practices and marketing strategy of matching competitors' offers to subprime and option loan borrowers was substantially increasing risk in the portfolios.
Layering of risk means the borrowers courted by these lenders had multiple characteristics that would put them at high risk for default, including no down payment, no documentation of income or assets, low credit scores and second mortgage in lieu of a down payment.
Because they allow investors to lay off the risk of borrowers' defaults, they free lenders to lend more.
In March, Democrats introduced legislation that would, among other things, loosen FHA restrictions for borrowers with higher credit risk.
Also, if they run low on cash and fail to pay taxes and insurance, they can lose their homes (1 out of 10 borrowers are currently at risk of default for this reason).
There are two possible explanations for this tightening: lenders and borrowers are feeling exceptionally risk-averse, or regulators are forcing banks to be too cautious in building up capital and liquidity for a rainy day.
Both ABS and MBS have prepayment risks, though these are especially pronounced for MBS. Prepayment risk is the risk of borrowers paying more than their required monthly payments, thereby reducing the interest of the loan.
FORBES: Introduction To Asset-Backed And Mortgage-Backed Securities
Others target lenders by requiring better loan-risk disclosure to borrowers.
When she discovered how prevalent they were in 2007, she began to call the bankers into her office to discover they were insulating their portfolios from the growing risk that the borrowers would default.
Capital markets have developed since then to spread the risk among many more borrowers.
Dr. PENNINGTON-CROSS: Then we're introducing a series of borrowers that will increase the overall risk of this insurance fund.
The loan originator has little incentive to vet borrowers carefully because it knows the risk will soon be off its books.
It attempts to minimize the subordinated risk by looking for borrowers that have conservative capital structures, generate a steady stream of cash and are run by experienced managers with big ownership stakes.
It may be perfectly fine - and it would be perfectly fine if the borrowers that come from subprime into FHA look a lot like current FHA borrowers in terms of their credit risk profiles.
There is a risk that, just when borrowers get into difficulty, hedge-fund clients may demand their money back.
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