BluefoxToday blog : New mortgage lending rules from the Fed

New mortgage lending rules from the Fed

The revered Fed is taking steps to streamline how lenders go about making higher-priced home loans, higher-priced by the way is another way to say subprime, to borrowers. These guidelines are intended for the entire spectrum of mortgage lenders and not just for those under the Fed's regulatory umbrella. As of right now, they'll go into effect on October 1, 2009 to give everybody time to adjust.

One of the better rules is the one where the lender must verify that the borrower's income and assets do indeed meet the repayment needs of a particular product he applied for. The repayment ability is arrived at by taking into account the highest scheduled payment amount during the first seven years. What this leads to is that when the subprime mortgage loan does return to the marketplace in full force again, it's going look a lot different from its recently abused counterpart. This is the government's plan to try to keep the consumer away from a potential financial meltdown. 

Another good one is the required establishment of an escrow account for property taxes and hazard insurance which then are payable along with the monthly mortgage payment. In the past omitting these was used by some lenders to make the monthly payment look more appealing, lower that is, and thus give the borrower a false sense of being able to afford his obligation. This will help the homeowners who lack the discipline and bookkeeping capacity to make timely payments if they are tasked with it.

Banning the prepayment penalty on variable-rate loans that can change during the first four years is a question mark. For other loans, like the 30-year fixed, the ban can't go beyond two years and both ideas are open to criticism. The prepayment penalty actually allowed lenders to lower the interest rates on their programs, so long as the borrower agreed not to pay off the loan early. Investors, or lenders, carefully figure their yield on each loan program and if a particular loan is retired early, say in 12 months, instead of, say 4 years, the investors are going to lose money because the premature payoff cuts out their stream of anticipated income. Instituting this rule will slightly increase interest rates across the board due to the risk of an early payoff.

By the way, they are still working on how to determine which loans exactly are higher-priced.




Provided by: 

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

Comment balloon 10 commentsEsko Kiuru • July 15 2008 11:08PM





Posted by Bill C. Merrell, Ph.D. - Merrell Institue (Merrell Institute ~ Appraisal Education Network) almost 12 years ago

Really good information. Have you been stealing brother Ben's note book?

Posted by Fred Chamberlin, Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant (Guild Mortgage Co - Oak Harbor WA) almost 12 years ago


Thanks for the post. I agree the jury is still out on the benefits of the changes, especially as to their ability to stimulates sales activity and stablize the market. ...nearly a  year from now!

Posted by William Collins, Property and Asset Management (ERA Queen City Realty) almost 12 years ago

Esko I like the changes and they should put them enforce right now instead of waiting until October 2009

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 12 years ago


Thanks for the encouragement.

Posted by Esko Kiuru almost 12 years ago


Ben is right now the man. I'm looking over his shoulder as he drafts new rules.

Posted by Esko Kiuru almost 12 years ago


Like the escrow rule is a must-have and should be instituted pronto.

Posted by Esko Kiuru almost 12 years ago


Don't quite understand why such a delay in implementing these rules.

Posted by Esko Kiuru almost 12 years ago

Esko - Better late than never I suppose but it is a little like closing the barn door after the horse gets out the horse is still out there.

Posted by Barrie Clulow (My Time Is My Own) almost 12 years ago


Yeah, now they are trying to fix things that should've been done a few moons ago.

Posted by Esko Kiuru almost 12 years ago