Mortgage defaults and rising foreclosures are among many troubling headlines in our economy, but can subprime lending problems really be the cause behind all these trends.

Amidst the clamor over mortgage and world financial markets, IndyMac failing, Fannie and Freddie woes, GMC layoffs, and the debate on the housing bill, the Federal Reserve Board approved the final rule for home mortgage regulations.

The final rule establishes a category of high priced loans and offers consumer protection for loans in that category.

•1.       Must base lending decision on borrower income and assets

•2.       Income and assets used to qualify must be documented

•3.       Prepayment penalty ban if rate can change within 4 years, maximum PPP term for all loans is 2 years

•4.       Require taxes and insurance escrow

Additional provisions target early disclosure of fees, coercion of appraisers, loan servicing issues, and misleading advertising practices.

High priced loan will be loans with an APR 1.5% for first mortgage loans, and 3.5% for second mortgage loans, above the Federal Reserve Board "average prime offer rate."

Yield spread premiums are left in place, as consumer testing of proposed disclosures proved confusing. Yield spread premiums remain a high profile target of consumer groups and regulatory agencies. Expect more efforts to be made to distinguish between "legitimate payments to brokers and fees intended to land a borrower in a higher-cost mortgage."

The Federal Reserve and HUD will continue to review premium payments, as well as state auditors in Tennessee.

These issues are receiving impetus because of the current mortgage market crisis. Subprime lending practices are receiving the brunt of the blame for the mortgage defaults, but is that proving to be an accurate assessment?

The market itself has already accomplished most of these reforms.

The larger issues in the economy surely could not have been caused by subprime mortgage foreclosures. FHA , Fannie Mae, and Freddie Mac are all suffering losses. Recent events with IndyMac have raised concerns there are more bank failures possible. Credit card and student loan defaults are on the rise. The list could go on. Bad subprime loans did not cause all this, I do not think.

The subprime mortgage problems may have been the first sign, and not the cause, of more fundamental economic problems. Recent prominent layoffs and increasing oil prices are not good news.  A headline today  mentions that TN state revenues are in decline. TN has no income tax and relies heavily on sales tax for revenue.

Everyone keeps talking about abusive practices and bad loans, but these do not explain defaults in FHA and conventional mortgages.

Richard Smith
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.