Fed Endorses New Home Mortgage Plan

[Nick Ostrowski]

This article says the plan could be finalized next year. Let's hope it is sooner than later.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~


WASHINGTON - The Federal Reserve endorsed new rules Tuesday that would give people taking out home mortgages new protections against shady lending practices.

The proposed rules, approved in a 5-0 vote by the board, are geared to providing safeguards to the riskiest "subprime" borrowers, already painfully stung by the housing and credit debacles. The proposal is expected to apply to new loans made by all types of lenders, including banks and brokers. The plan could be finalized next year.

The Fed, which has regulatory powers over the nation's banking system, is proposing:

_restricting lenders from penalizing certain subprime borrowers — those with tarnished credit or low incomes — who pay off their loans early. The restriction would apply to loans that meet certain conditions, including that the penalty expire at least 60 days before any possible payment increase.

_forcing lenders to make sure that subprime borrowers set aside money to pay for taxes and insurance.

_barring lenders from making loans when they don't have proof of a borrower's income.

_prohibiting lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

"Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole," said Fed Chairman Ben Bernanke in prepared remarks. "They have no place in our mortgage system," he added.

Fed policymakers also are considering requiring financial disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees — except for a fee to obtain a credit report — until after the consumer receives the disclosures. The Fed also will consider prohibiting certain types of misleading or deceptive advertising for certain loans. It also would require that all applicable rates or payments be disclosed in ads with equal prominence as advertised introductory "teaser" rates.

In addition, the Fed is expected to propose barring lenders from paying mortgage brokers a fee that exceeds the amount the would-be borrower had agreed to in advance that the broker would receive.

And, the Fed would ban certain practices, such as failing to credit a mortgage payment to a borrower's account when the company servicing the mortgage receives it. The Fed also would prohibit a broker or other company from coercing or encouraging an appraiser to misrepresent the value of a home.

Before taking effect, the rules must be voted on again following a period of public comment and possible revisions.

The Fed's response has taken on heightened importance given the meltdown in the housing and credit markets that has led to record numbers of home foreclosures. The crisis has raised the odds that the economy might fall into a recession, roiled Wall Street and given Democrats and Republicans much fodder to blame each other.

The plan, if ultimately adopted, offers Bernanke, who took over the helm in February 2006, an important opportunity to put his imprint on the Fed's regulatory powers. Some critics have complained that Bernanke's predecessor — Alan Greenspan, who ran the Fed for 18 1/2 years — failed to act as a forceful regulator especially during the 2001-2005 housing boom, when easy credit spurred lots of subprime home loans and many exotic types of mortgages.

When the housing market went bust, subprime loans were most heavily affected.

Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72 percent entered the foreclosure process during those months. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.

When home values weakened, borrowers were left with loan balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.

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[Jim Luttrall]

Sounds like more laws to protect us from ourselves!
Big brother with more regulations that will add even more pages to the reams of paper that no one reads when buying a house.
The market has weeded out those sub-prime lenders that required no proof of ability to repay, what will a few MORE laws do other than stifle recovery?
The only lender for those with less than sterling credit will be... you guessed it FHA (aka big brother) more things the low income person is beholdin' to the Government for providing.

I fear that most of this new law will be little more than window dressing and actually do more harm than good. It reminds me of the saying, "out of the frying pan and into the fire"

Ok, I'm off my soap box now.

[Nick Ostrowski]

Blame for the current sub-prime woes falls in the hands of both consumers and lenders. But you have to place the bulk of the blame on the consumers. Nobody put a gun to their heads and simple math should tell you if you can afford a house. All of this is a testiment to how many people have poor credit and probably don't have the self control needed to afford a house. But that said, why did the lenders feel the need to take chances on doling out so many loans with rates that they knew stood a chance to ratchet up to the level of being unaffordable?

At the end of the day, consumers are responsible for their own actions. Living on credit caught up with a lot of them.

[Jim Luttrall]

All of this is a testament to how many people have poor credit and probably don't have the self control needed to afford a house. But that said, why did the lenders feel the need to take chances on doling out so many loans with rates that they knew stood a chance to ratchet up to the level of being unfordable?

One word - Greed - on both the consumers part (I want it now along with two car payments and a boat) and on the lenders part (I know they are not good risks, but look at how much money we can make). Then the house of cards comes tumbling down.
It is hard to make enough laws to protect people from stupidity.

[Billy Stephens]

I think the Lenders made most of those loans thinking : With the Housing Market (was)
We'll just pocket as much as we can(fees)(commission) up front sell the loans and let someone else TRY to get paid. Plus fraud. No Proof of Income?

On the consumer side ( If they are stupid enough ,"With My credit", they should know I don't pay, I'm getting it. Greed.

Now they All what someone else to pay. Guess Who.

[Rick Hurst]

I feel bad for anyone who is losing their home, but most of these people who took these escalating type loans knew what they were in for when they signed the mortgage papers.

Personally, I blame the lenders that do the B paper type loans.

They made it too easy for people to get into a home. NO money down, piss poor credit ok.

Why is this a shock to anyone why the mortgage business is in the shape it is?

[Sean Bacon]

Nick,

I agree with you that both consumers and lenders bear responsibility, but I disagree with you that consumers should bear the bulk of the blame. Most of the people that were buying homes under "No Money Down", No Doc Loans did not know they were getting a subprime loan. They heard one thing "No Money Down" and that was it. I doubt they rarely heard that this will adjust up in 1, 2, or 3 years, if the loan officer actually knew that it would. In the last 5 years, I saw a lot of one-trick pony lenders who had just this one product and pushed everyone they came across into it, regardless of credit score. I know a few 700+ credit scores who have this as well.

From a business standpoint, Wall Street pushed the lenders to create more products that would get more people "so-called qualified". You guys know that a lot of these loans were repackaged as investment products for investors with a higher return than normal. Initially, 600+ credit score and 3% down using FHA..ok that segment of the market is gone. Who should we extend this to now? Let's go below 600 credit score and no money down. Wall Street's unwillingness to invest in these products because the return dropped considerably is what speeded this up. More Foreclosures = Less return dollars to investors. It will just go back to the way it used to be, now a 620 credit score seems to be the minimum to even get you considered, and it may be closer to 700 to have a decent rate.

Just my 3 cents.

[Matt Fellman]

This is yet another perfect example of our government being reactive rather than pro-acitve. These rules, which I'm not even sure I agree with, would have been great 5 years ago. And the next time they'll likely matter is when we see another boom like we did over the last few years.... probably never.