By: Gaurav Bhola, MSM, Managing EditorThe growing concerns about the mortgage market have been leading to great unease in the corridors of the Federal Reserve (Fed). The Fed is concerned about growing foreclosures and continued stability of the mortgage market. The central bank is putting forward proposals that would enhance protections for home buyers and restrict abusive lending.
The subprime mortgages crisis has engendered within the Fed to impose stricter regulations on mortgage lenders.
The goal of the Fed is to encourage responsible mortgage lending, for the betterment of consumers and the economy. Also, they want consumers to take home loan decisions with confidence; unprincipled mortgage loan lending will not be acceptable.
The Fed’s new proposed rules for subprime mortgages are open for public comment for 90 days, after which the central bank will review any comments and consider making alterations before issuing the final rules.
Subprime Mortgages Recommendations
Stop mortgage lenders from giving consumers unaffordable loans. Prohibit mortgage brokers or mortgage lenders from extending credit with no consideration of the person’s capability to repay the loan.
A main reason for the rise in foreclosures is due to mortgage lenders doling out subprime mortgage home loans with adjustable rate features based on the borrowers’ ability pay the mortgage on the low introductory interest rate, not the future reset mortgage rate. Herein, many subprime adjustable rate mortgages scheduled for interest rates reset before 2010, would lead to many more foreclosures due to the consumers’ inability to pay the higher interest rate mortgages.
Thus, the central bank has proposed for mortgage lenders and mortgage brokers to assess the consumers’ ability to pay the mortgage loan on the reset rates not the low introductory interest rates.
End “liar” mortgages. Mortgage lenders don’t verify the borrowers’ income before making the loan, leading to the borrowers’ incapacity to make payments on their homes, let alone the reset rates. Instead, home loan lenders would have to verify the borrowers’ income and assets.
Eliminate or limit prepayment penalties. Currently, if homeowners want to do a mortgage refinance to lower mortgage rates, they are prevented from doing so because of punitive prepayment penalties that can be as much as six months of mortgage payments.
The Fed proposal would require lenders to waive prepayment penalties for 60 days prior to a loan rate resetting.
Necessitate or promote escrowing of insurance or taxes. Many lenders never disclosed to consumers the true costs of owning a home, excluded critical information.
This action by the Fed is welcome news for consumers; even Wall Street is hailing the proposals. However, it is still not clear until the final rules come out, how the Fed balances consumer interests and business interests
