New Fed Rules Effectively Codify Mortgage Squeeze

New federal rules to protect consumers from bad loans do little more than codify steps lenders are already taking, but borrowers may feel a tighter pinch.

by Broderick Perkins
© 2008 DeadlineNews.Com

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Deadline Newsroom - Paramount in new federal regulations approved to foster more responsible mortgage lending, are the implications for consumers shopping for a home loan.

The Federal Reserve Board's new rule amends the "Truth In Lending Act," Regulation Z under the "Home Ownership and Equity Protection Act (HOEPA)".

HOEPA was originally passed in 1994 to target abusive practices in home equity lending. The Fed's new move extends protections to home purchase loans.

Critics complain the rule is long over due because unfair, abusive and deceptive home mortgage lending practices get much of the blame for the current housing crisis that has already put millions of properties in foreclosure and former owners on the street.

Also, most lenders long ago curtailed many of the practices now forbidden by the new regulations, critics say. The horse is already out of the barn, so to speak, and the new regulations will do little to corral the market's downward stampede.

However, the new rules should help prevent future runs on bad loans by helping remove them from the market. Perhaps more important, key provisions in the new rules will give consumers cause to pause before shopping for a mortgage.

Effective October 1, 2009, the new rule's four key provisions (along with how each will impact consumers), for a newly defined, but yet to be detailed category of "higher-priced mortgage loans," include protections that will:

• Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value.

This forces lenders to more closely scrutinize a borrower's debt-to-income ratio, looking for less debt, more income and savings, larger down payments and other liquid assets the borrower can fall back on. Consumers may have to take more time saving and paying off debt before buying a home.

• Require creditors to verify the income and assets they rely upon to determine repayment ability.

This provision will make it especially tough for home-based business owners, self-employed people, contract workers and others who don't get a regular pay stub. Lenders were already asking many of these borrowers for a CPA's or other tax professional's certified profit-and-loss statement to reveal income viability.

• Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years.

Without this lender risk-reducing tool they are more likely to offer a narrower variety of loans, forcing some consumers out of the market and more of them to spend more time shopping around. Shopping around, of course, is a smart practice.

• Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.

This means borrowers will have to figure on paying more each month than just the home loan's principle and interest (or interest only, where available). This is actually a useful tool for borrowers, especially those who procrastinate and gamble they'll have the lump sum cash when the insurance premium or property tax comes due. Financial counselors have always advised spreading out the cost of insurance and taxes over 12 monthly payments is much easier to fit into a household budget than the lump sum risk.

In addition to rules for higher priced home loans other rules include:

• Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home's value.

• Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. Servicers are also required to credit consumers' loan payments as of the date of receipt.

• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer's principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans.

• The rules also specifically outlaws seven deceptive and misleading advertising and requires more extensive information about rates, monthly payments and other loan features.

© 2008 DeadlineNews.Com

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Broderick Perkins, an award-winning consumer journalist of 30 years, is publisher and executive editor of San Jose, CA-based DeadlineNews Group -- DeadlineNews.Com, a real estate news and consulting service and Web site and the new Deadline Newsroom, DeadlineNews.Com's news back shop. In both cases, it's where all the news really hits home.

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