Fed to propose new mortgage rules
The Federal Reserve will propose a much stricter set of rules for mortgage lenders to avert abusive lending. The Fed was given the authority and direction to issue rules to address unfair mortgage practices in 1994 under the Home Ownership and Equity Protection Act (HOEPA).
Some highlights of possible Fed proposals.
Base affordability on a borrowers' ability to repay a loan at the reset rate rather than the initial rate.
One of the reasons that people are having difficulty making monthly payments after the interest rate resets on an adjustable loan product is that lenders measured borrowers’ ability to repay the loan based on the low introductory rate rather than the higher rate the loan would reset to. There is nothing wrong with an adjustable loan product but using it to qualify for a more expensive home was one of the abuses that borrowers employed and lenders went along with in order to be able to purchase a more expensive home.
Require or encourage escrow for taxes and insurance.
Here is a big one. Did you know that escrow is required for all loans that have a loan to value ratio higher than 80% but was not required for any subprime loans. In effect, subprime lenders did not disclose the true cost of owning a home nor did they collect taxes and insurance along with the mortgage payment and hold them in escrow until the payment became due.
Now everyone knows most people have difficult saving money after paying their mortgage, car payment, credit card bills and all their typical monthly expenses. Escrow is effectively a forced savings program and should absolutely be part of any loan with a high loan to value ratio. Additionally, anyone who feels that they need a forced savings program should certainly set aside money in an escrow account each month rather than have to scramble to come up with a significant amount money especially around the holidays.
On the other hand, aren’t we all hearing horror stories about lenders failing to pay taxes and insurance when due so when the mortgage lender ties up your money while paying no interest to you, it should at the very least be required to pay taxes and insurance on time.
A few other proposals on the table:
Restrict the use of stated income loans.
Prohibit or limit prepayment penalties.
Curb or better disclose mortgage broker incentives.
Prohibit coercion of appraisers.
Require better disclosure overall.