Chris Cantell Discusses Markets: New rules for mortgages by Livia Cseresova

On Monday the Fed approved new rules to crack down on abusive lending practices. Its new plan will restrict some lending practices that were prominent in the housing crisis.

Free standards of lending in ‘housing boom’ days ended up burning borrowers with low incomes or tarnished credit, because they got loans they couldn’t afford.

And exactly because of this, the new rules will forbid lenders from making loans with no proof of borrower’s earnings. Lenders will have to ensure that borrowers set some money aside to pay the taxes and insurance.

Lenders won’t be able to penalize borrowers who pay loans off too early. “Prepayment” penalties are forbidden if the payment may change during the first four years of the mortgage. Otherwise, a penalty cannot be imposed in the first two years of the mortgage.

Lenders will also have to consider a borrower’s ability to repay a home loan from other sources than the home’s value.

According to critics the Fed’s failure to restrict some of lending practices some time ago ‘helped’ the mortgage meltdown.

And since today there are fewer home-buyers, the new rules might not be really tested for some time, and some of the shady practices haven’t even survived, thanks to the mortgage meltdown.

The president of Heritage National Mortgage in Grand Rapids, Pava Leyrer, says that lenders have tightened their standards already. He said that the situation of people "a year ago may have been completely different than it is now. I can't find loans for them and they're good borrowers."

The plan for all the mortgages is advertising, which will contain additional info about loan features and will not be misleading.

Also, companies servicing mortgages must credit a mortgage payment to the homeowner's account on the day it is received. Brokers and others are banned from "coercing or encouraging" an appraiser to misrepresent the value of a home.
Lenders are worried that the rules could shrink mortgage options for people and harden obtaining financing.

According to Kieran Quinn, chairman of the Mortgage Bankers Association, the rules are a "thoughtful effort to tackle difficult concerns" and will be carefully reviewed. The plan doesn’t concern current loans; it will only apply to new ones.
Most of the rules take effect on October 1, except for the escrow provisions taking effect in April 2010.

by Livia Cseresova for PocketNews (http://pocketnews.tv)

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