Finally someone is doing something about the mortgage crisis. The question is if the Federal Reserve is acting to late? What they are proposing has been discussed for some time. Here is the Bloomberg article in its entirety.
What does this mean for borrowers, well it's great for anyone with a sub-prime loan that has fixed their credit problems. For those whom are still struggling it really means nothing more then that they need to get out of their house and rent! If these changes are implemented you'll see an upsurge in new refinances, however, there are going to be painful realizations that some borrowers just won't be able to qualify for any loan. The Fed is also suggesting that lenders do away with stated and no doc loans. They also want the lenders to really focus on reality when it comes to borrowers being able to pay back these loans. One suggestion is to factor the insurance and property taxes, which does occur in most prime loans, but hasn't always been the fact in sub-prime originations. This would of course reduce the number of qualified buyers by even larger margins.
This also has far reaching impact in communities as well. Property taxes are high in many area's of the country, and with these changes the average citizen is going to be more aware of how much their being soaked for each month. Furthermore you'll see fewer marginal buyers qualify for loans, which will increase the demand for rental property's, which of course will drive up rents.
What I fully expect to see is a move by congress to increase the breadth and scope of HUD (FHA). The inability for minority's to afford housing will be a hot button issue in the 2008 presidential election, and more of an issue in the 2010 congressional elections. If the banks over react in their underwriting crackdowns, watch Congress get involved once again.
The banks are going to whine and complain about these new rules. The argument is going to be that if banks allow pre-payment penalties to be waived that investors will have less confidence in their paper. Well let's be honest bankers, the party's been over since August of this year. There is so little confidence in mortgage paper at this point, I think most investors would be happy to just get back their money, even if they make a little less then projected from adding back pre-payment penalty's.
Perhaps this is a first step in a long road to recovery, it's just too bad it takes so long in our country to react to crisis.
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