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.