It has been reported that approximately 200 people were waiting in line at Pasadena based IndyMac bank this morning to withdraw any and all money they could. For all the people who had more than the insured $100,000 at IndyMac, the FDIC has said they will cover up to half of the rest. That comes to a lot of money, so we’ll have to wait and see if they follow through with that promise. Meanwhile, The Federal Reserve unanimously approved new mortgage lending rules Monday in a crackdown on shady practices – particularly those involving subprime loans made to borrowers with weak credit.
This is the bill I wrote about last week. Both consumers and mortgage lenders were displeased with the original bill, which has since been tweaked in order to make as many people happy as possible. To that end, the agency made several substantial revisions to the proposed regulations it unveiled in December. Many of the changes acknowledged consumer advocates’ concerns that the rules still contained too many loopholes that would allow shady mortgage lending practices to continue. But the Fed also made some concessions to industry executives, who feared increasing oversight would lead to less lending.
The new rules will apply to all mortgage lenders, not just those supervised and examined by the Fed. The new rules will go into effect Oct. 1, 2009, but that doesn’t mean the investigation is over. The people who brought us this bill have announced that they will continue to scrutinize all mortgage lending companies, in order to ensure they are following the new rules and aren’t getting around them and further complicating the mess we have in the housing market.
So here are the rules as they stand right now. The new rules governing “higher-priced,” or subprime, loans will:
Prohibit creditors from extending credit without regard to a consumer’s ability to repay the loan from income and assets other than the home’s value. The mortgage lender will comply by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. Mortgage lenders will also have to verify income and assets that can determine whether or not the borrower is fiscally able to pay their mortgage.
Furthermore, the new bill will 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. Mortgage lenders and creditors will also have to establish escrow account for property taxes and homeowner’s insurance. This rule will be phased in during 2010.
One of the changes The Fed made was to the definition of higher-priced loans with regards to mortgages rates that are at least 1.5 percentage points above the average mortgage rate, which is published by Freddie Mac; who by the way is also under the government’s radar for shady mortgage lending practices. No here’s a big one I have personally been affected by; Creditors and mortgage brokers cannot coerce a real estate appraiser to misstate a home’s value. I have lost thousands of dollars over the past five years do to this practice. For those real estate appraisers unwilling to fudge the numbers, this comes as a happy occasion.
Mortgage lending companies are now to be upfront and completely honest about late fees and hidden fees. It seems they were glossing over this information, which is one of the reasons so many people in the housing market find themselves in foreclosure now. They were led to believe their mortgage would be one fee, only to find out it was more do to those hidden fees. In order to further ensure people getting into the housing market know what they are in for, The Feds have included a rule that in any advertisement a company must include additional information about rates, monthly payments and loan features. The rule also bans seven deceptive practices, such as saying a rate is fixed when it can change. Sadly, that kind of stuff should have already been the standard operating practice. I find it disgusting that the government has to put these rules into writing and make them law.
Most advocates for the housing market and real estate consumer are generally pleased with the bill, and feel their months and months of keeping up with the progress of it has paid off. More than 4,500 comments were filed since the agency announced its plan in late December, and after reviewing the final rules, advocates said they felt the changes did provide additional protections for the consumers. In particular, it’s important that the Fed eliminated the requirement that borrowers prove lenders engaged in a “pattern or practice” of originating unaffordable loans since that’s very hard to do, said Brenda Muniz, legislative director of Acorn, a housing advocacy group.
As for whether this new bill will help the slumping housing market and bring real estate back to stability, that remains to be seen. There are also people who feel this bill is too little too late. But what about you; do you think this new bill will curtail shady mortgage lending practices. Leave us a comment and tell us how you feel.