Subprime mortgage rules revised

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The Feds, in other words the federal monetary system regulators, have been working hard on this for quite some time and at last they can present the final product for distribution. It took a while because they had to listen to all sides on the issue and then merge the more useful ideas into policy decisions. But the new rules how to write subprime home loans are in. One thing to remember is that they only apply to federally regulated lenders.

Subprime mortgages are offered to borrowers who have had past credit problems or have thin credit files. These loans normally carry a higher interest rate than prime products, but they do make it possible for this market segment to purchase a home of their own they otherwise wouldn't qualify for.

The first rule intends to rein in predatory lending. What it says is that lenders ought to steer clear of fraud or deception in an attempt to hide the importance of the borrower's debt obligation and also not lure them into becoming serial refinance candidates for financial benefit. This is one of the reasons that led to the current troubles with subprime delinquencies and it's hard to argue against it. 

The second one mandates the tightening of underwriting procedures, saying that a mortgage approval should be determined by the fully-indexed interest rate, not the teaser, or starter, rate. Making loan workouts in case of an impending foreclosure easier to accomplish is the third rule. Both of these are kind of reiteration of what most lenders are already doing anyway. As foreclosure numbers started to climb months ago, lenders jumped into action and adjusted their lending practices to the daily realities.  

The fourth rule talks about making disclosures more understandable. They ought not to be misleading or unclear and they should be detailed as to loan costs and the risks involved with each product. In my view, disclosures presently are quite extensive, but some additional upgrading wouldn't hurt.

As was mentioned above, these rules only apply to federally regulated lenders. What about all the mortgage brokers and non-regulated lenders out there? Leaving them out makes these measures somewhat redundant.

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Esko Kiuru
Mortgage, real estate and apartment industry analyst - syndicated mortgage, housing and property management blog
My cell: 702-499-1006


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William Johnson
RE/MAX Associates - La Jolla, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE
Very nice post. Good information.
Jul 03, 2007 11:41 AM #1
Alan Mills - Creating Closer Communication
ACN - Spokane, WA

What do you mean by "What about all the mortgage brokers and non-regulated lenders"?

Mortgage Brokers are by no means unregulated. In fact, it is typically the BANKS which fund lobbying to make certain that MB are regulated heavilly. Even the verbage used in legislation and State Regulation is inflammatory. Example? OK. How about YSP. It is described as a 'kickback' and must be disclosed by Mortgage Brokers. Banks, on the other hand, keep silent about the profit in their transactions.

So let's agree, shall we, that problems don't exist just on one side of the industry. It is disreputable, dishonest and conniving individuals that bring the whole industry into disrepute.

Bring on regulation so that the consumer gets the same treatment and disclosures no matter where they buy their mortgage. One product - one set of rules.

Jul 03, 2007 12:11 PM #2
Esko Kiuru
Bethesda, MD


Thanks. Just trying to stay on top of new developments.


That's the problem. These new federal rules only cover a portion of the industry. The rest are mostly regulated by states and those rules vary.

Jul 03, 2007 02:01 PM #3
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