Yesterday the Federal Reserve released guidance to banks on subprime mortgage lending. Like most government initiatives, this guidance is a day late and a dollar short. In efforts to slam the lenders, the main stream media also forgot to ask one very important point about the guidance. Who exactly are these lending guidelines supposed to apply? The last time I checked, the subprime mortgage industry was all but wiped out. Did the Fed's take a look at the lender implode-o-meter? Seriously, I don't even think I can name a subprime mortgage lender that is still in business!
Nevertheless, let's take a look at some of the subprime guidance.
Verification of Income: Lenders must verify income. This means no more stated income loans. This will probably hurt a lot of self-employed borrowers, but the reality is most lenders eliminated these products like a year and a half ago. Once again, a day late and a dollar short.
Ban Prepayment Penalties: The ban would cover loans that have a rate change in the first four years and be limited to two years on on some higher cost loans. I don't really have a problem with this ruling. One of the insidious tactics of subprime lenders was to put a three year prepayment penalty on a two year adjustable rate loan. Of course, trapping an already marginal borrower in a high cost loan that is going to get even costlier makes a lot of sense (sarcasm off). I really want to know who the genius was that came up with that idea.
Establishment of Escrow Accounts: Requires lenders to set up escrow accounts for taxes and homeowner's insurance. This is already required on most prime loans when you don't put 20% down, but subprime loans it was not required. I have mixed feelings about this. First, if you aren't responsible enough to save for taxes and insurance when the bill comes due, maybe that is a sign you shouldn't be a homeowner. Secondly, if the borrower can't afford to save for taxes and insurance on their own, maybe they don't qualify for the mortgage in the first place. Forcing them to pay it monthly doesn't change that fact. At it's worst, this ruling is basically saying subprime borrowers need the lender to be a nanny for them because they are too stupid to do it themselves.
Lenders & Brokers Can't Pressure Appraisers: I am still trying to figure this one out. Appraisers have been complaining that lenders pressure then to meet values. My position is that either appraisers are professionals or they are not. Getting the Feds to say lenders and brokers can't pressure appraisers is basically saying that appraisers are bunch of pansies. Maybe they just need to grow a pair and learn to say no. This is like me as a lender saying the borrower pressured me to over state their income, so I need a law in place that makes it illegal. Give me a break. You either are going to commit fraud or you are not.
Better service from "Servicing" Companies: Basically says they need to get their act together in terms of applying payments and just doing things that make good business sense. Part of the problem is half the call centers are located overseas. Maybe the Feds should have just said hire people who speak english and pay them more than $5.00 to work in service centers.
Good Faith Estimates: Creditors must provide good faith estimates within three business days. I don't know... I thought we already had to do this. My feeling about GFE's is that they are only as good as the person preparing it. I think the Feds should have just said to consumers to stop focusing on nickel and dime rate shopping and hire a professional mortgage provider to handle your largest financial transaction. A lot of the above points could be prevented if consumers actually took the time to care about who is handling the transaction instead of who is $50 cheaper. But I digress...
Advertising: Basically says advertisements need to be more truthful. What this really means is that mortgage ads are now going to look like pharmaceutical ads where the fine print takes up two pages, but the ad is only half a page. Refer to the point above. The Fed should have just said consumer should ignore mortgage advertising altogether because most mortgage professionals will tell you that there is no way to truthfully advertise mortgages.
Yield Spread Premiums: This was the biggest news. The Fed basically showed they know that YSP is nothing more than a profit margin and that there is a difference between the wholesale rate and retail rate. YSP is not an evil three letter acronym and the commie consumer groups have no idea what they are talking about when it comes to YSP and its impact on consumers. In short for consumers, YSP is the profit that brokers make that is paid to them by the bank. Nothing more. All you need to worry about as a consumer is what your final rate is and the total out of pocket cost to get that rate. All the other stuff is just too much information.
Just my two cents...
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