Sub-Prime Mortgage Regulations
By Sharon Secor,
il-odm.org Staff Writer
As was recently reported by numerous news outlets, the Federal Reserve Board has had concerns about the sub-prime lending industry, due to record numbers of foreclosures and the number of people who seem to be sliding in that direction. This week, according to the Wall Street Journal, the Fed has decided to take action.
Federal regulators have decided to tighten lending practices a bit. One problematic area that has been addressed by the new regulations is that of accurate borrower income information. In many cases, lenders simply were not confirming that borrowers had adequate income with which to meet the scheduled repayment agreement.
According to a June 29, 2007, USA Today story, fully one half of the sub-prime loans made in 2006 were made on “stated income” — meaning that it was not verified through documentation. Predatory lenders don’t really care whether the loan is paid off or not, really. That’s because if the borrower ends up going into foreclosure, the lender gains the money paid until that point, as well as gaining via the foreclosure. Income verification protects the borrower as well as the lender.
Other regulations that have been tightened include making sure that the borrower can make the payments on the monthly amount that will be in effect after the starter rate, or “teaser rate”, has expired. This is a good move, as it is exactly at that point that many sub-prime borrowers start to falter. Disclosures, as reported by Realty Times, must be clear and able to be understood by the borrower.
The new regulations have also addressed the adjustable rate mortgage problem that so many are facing today. Borrowers are to be allowed 60 days to refinance a loan before their interest rate goes up and, if they are able to do so, then that refinancing is to take place without penalty. This is significant, because during the past year, just under three quarters of sub-prime loans included prepayment penalties.
There are some consumer advocate groups and lenders that are concerned that this tightening of sub-prime lending policies will make it more difficult for this set of borrowers to get the credit they need to be able to buy a home. However, looking at the regulations carefully reveals that there is quite a bit that is actually beneficial for the consumer in search of the right mortgage or refinancing opportunity.
Other advocate groups and lenders recognize the important consumer protections offered by the new regulations, noting that they will help to make it more difficult for predatory lenders to take advantage of borrowers who, with their specific credit challenges, may not have the same borrowing opportunities that those with better credit do. There are some among this group that hope these federal guidelines will influence those of individual states.
Hopefully, the new regulations will help to bring the rates of foreclosures under control. Slowing down the foreclosure rate is good not only for lenders, but also for the consumer as well.