Today, the Federal Reserve is set to propose a new set of regulatory rules to crack down on abusive lending and protect homebuyers from predatory lending.
The proposal will address many issues:
Not allowing lenders to give homebuyers loans they cannot afford: In the past, lenders have used and abused ARM loans that begin with a very low rate, only to raise substantially in 2-3 years. In qualifying the borrower, lenders only needed to use the start rate...one reason for the state we are in, homeowner's rates are going up and they cannot afford the new higher payment. This rule would restrict lenders to ONLY qualify homebuyers at the fully indexed rate, not the start rate.
MN Mortgage Lady's two cents: Good! Allow a potential homebuyer to reap the benefits of a low introductory rate, but qualified at the fully indexed rate. I want to add: Disclosure, disclosure, disclosure! We should also be required to fully disclose through CLEAR, signed documentation that the borrower is getting into an ARM and that this is what they truly want.
Restrict "Liar Loans": The Fed is going to propose the restriction of stated income loans. The thought is that homebuyers were qualified for loans based on a facetious income (thus, the liar loan) and in reality could not afford the home they were buying in the first place.
MN Mortgage Lady's two cents: I have huge issues with this proposal, particularly for the self-employed borrower with stellar credit and reserves in the bank. Stellar credit borrowers are savvy with their finances. They have stellar credit for a reason. The self-employed borrower utilizes every tax break and deduction known to mankind. They have to. And why not? On paper (ie: tax returns), their income looks like dirt...good for tax purposes, bad for getting a mortgage. Should the self-employed, stellar credit, reserves in the bank borrower be thrown out of the home financing ring because the Feds think that every stated loan is a "liar loan"? Absolutely not, in my humble opinion.
Prohibit, or even limit prepayment penalties: Self explanatory
MN Mortgage Lady's two cents: Woohoo! I'm all for it.
Disclose broker incentives: They are talking about "yield spread premium". The spread, or dollar incentive, given to the broker for an interest rate given to a borrower above the par rate. We're not clear on exactly how the Fed is going to address this issue, but disclosure is on the radar screen.
MN Mortgage Lady's two cents: Don't take it away. This is a free enterprise country and even brokers are entitled to be prosperous. But disclosure to the borrower? Absolutely...let's go.
Encourage or even require escrowing taxes and insurance: In the past, subprime lenders did not collect for taxes and insurance. Heck, they didn't even disclose the true cost of owning a home to the borrower...conveniently not mentioning taxes and insurance as part of the total cost. In the end, the homeowner, once again, could not afford the home because taxes and insurance was not considered. The Feds are considering, in the least, disclosure of this cost.
MN Mortgage Lady's two cents: First, I can't believe that loan officers would deliberately hide this information in the first place. Albeit, I can't believe many things that go on...shame on them. Disclosure is great...I believe in disclosure whole heartedly. But requiring escrows? I say yes for less-than-good-credit borrowers. We all need to reduce risk. But back to the stellar credit borrower? Again, these people are savvy...I think it should be their choice after disclosure.
Require better disclosure overall: Again, disclosing all aspects of the mortgage loan in a clear and timely manner. The feds want to ensure that consumers have the ability to avoid loans that are not in their best interest.
MN Mortgage Lady's two cents: Although I do not need the Feds to tell me to disclose, obviously some do. Again, I can't believe and it just shocks me that lenders and loan officers blatantly try to get away with sneaky practices...all in the name of making a buck...forgetting the borrower and homebuyer and the effects of their bad practice on their clients' lives. Shame on them, shame on them. In my humble opinion, I hope their butts end up on the curb. Hats off to the Feds...Let's disclose all day long.
Sherri Sherpy
MN Mortgage Mom
I was under the impression that stated loans were only being restricted on the sub-prime side. If so, good they are liar loans. If not, in the case of borrowers with stellar credit, I am totally with you. Even people that are W2'ed sometime own properties and have a tough time proving income. Finally, as far as full disclosure goes... Amen!!!! I was we all saw things this way.