New rules for higher-cost loans to take effect Thursday...

By
Real Estate Broker/Owner with SmartRealty Solutions

New rules targeted primarily at mortgage lenders making higher-cost loans take effect Thursday, more than a year after they were finalized by the Federal Reserve. On Oct. 1, new rules adopted by the Federal Reserve will go into effect, requiring greater diligence on the part of mortgage lenders and brokers who make so-called high cost loans for borrowers with weak credit. The interest rates on these loans are at least 1.5 percentage points higher than the average prime mortgage rate.

The regulations - finalized in July 2008 but only now being put into effect - bar lenders from making a high-cost mortgage without verifying that a borrower could repay the loan in the conventional way, and not simply through a foreclosure sale. During the home lending boom from 2003 to 2006, subprime lenders would often offer loans without requiring borrowers to prove that they could make the monthly payments. With stated-income loans - or as some called them, "liar loans" - borrowers could easily fabricate annual income figures and even buy a home without a down payment.

The final rule adds four key protections for a newly defined category of "higher-priced mortgage loans" secured by a consumer's principal dwelling. For loans in this category, these protections 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. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."

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

· 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. This rule is substantially more restrictive than originally proposed.

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

 

 

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Rainmaker
40,739
Kent Neumann
Waterstone Mortgage- An Integrity based mortgage bank - Bend, OR
Mortgage Banker

The horse is already out of the barn on this one.... these rules would have helped 5 years ago.  But now, most of the investors have applied these guidelines monthes ago.

Sep 29, 2009 08:55 AM #1
Rainmaker
217,561
Richard Shuman
The Only B.S. I Have is from the University of Massachusetts - Lake Mary, FL
Real Estate Broker - Orlando Area - Love Referrals
Lots of great information. Thanks for being on top of it.
Sep 29, 2009 08:58 AM #2
Rainer
31,349
Jason Lopez
SmartRealty Solutions - San Diego, CA

Agree Kent...but most buyers we deal with are not aware of these changes...knowledge is power! 

Sep 29, 2009 09:21 AM #3
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Rainer
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Jason Lopez

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