The Final Rule? 3 Years Late and Billions Later…
July 15th, 2008 Categories: Mortgage News
The Federal Reserve yesterday approved their ‘final rule for home mortgage loans to better protect consumers and facilitate responsible lending‘.
My gut reaction was WTF? The perpetual circle jerk just picked up a fat bottle of lube…this is besides the fact that the Final Rule reportedly doesn’t go into effect for another 14 months…Huh, what? I actually feel dumber for having read it.
From the release:
The final rule adds four key protections for a newly defined category of “higher-priced mortgage loans” secured by a consumer’s principal dwelling. For loans in this category, these protections will:
- Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a “pattern or practice.”
The “does not need to demonstrate that it is part of a pattern or practice” language is the most interesting line of the entire release, and reads like it’s about to be open season on the legal liability front for any “higher-priced mortgage loans” lender.
‘Assessing repayment ability based on the highest scheduled payment in the first seven years’ effectively means that any loan with a fixed payment period of less than 7 years, i.e. 2, 3, 5 Yr ARM’s, will likely no longer be an option for many borrowers.
- Require creditors to verify the income and assets they rely upon to determine repayment ability.
Brilliant!
- 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. This rule is substantially more restrictive than originally proposed.
So, no more ARM’s that adjust in 2 years (up to 3%) with 5 year prepayment penalties (equal to 3% of Loan Balance)? If Ameriquest wasn’t already out of business, they would be by October 2009…they made this practice nouveau chic. Don’t know of any lenders still stupid enough to allow this cute hedge clause for greater profitability at the borrowers expense…if they do, they should be hung to dry.
- Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.
Outside of being a rather practical ‘final rule’, this will drive down approvals since escrowing taxes and insurance drives up the monthly payment and kicks otherwise qualifying borrowers to the curb. The industry standard had been that any mortgage that had an LTV >80% required escrow.
If I were a non-agency lender, I’d just go ahead and get out of the industry now, the writing’s on the wall. ‘I’m gonna sue your ass!’ will be the mortgage slogan in late 2009.
This begs the question: Why are these ‘rules’ restricted to “higher-priced mortgage loan” lenders, and not all lenders?
More from the Fed:
In addition to the rules governing higher-priced loans, the rules adopt the following protections for loans secured by a consumer’s principal dwelling, regardless of whether the loan is higher-priced:
- Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home’s value.
You mean this was cool before the Final Rule?
- Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. In addition, servicers are required to credit consumers’ loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.
- Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer’s credit history.
I can’t believe that this language has to be reduced to writing again. Like, ‘This time were seriously serious, seriously!’
Further:
One element of the original proposal has been withdrawn. The Federal Reserve Board had proposed for public comment certain requirements pertaining to so-called “yield-spread premiums.” During the intervening period, the Board engaged in consumer testing that cast significant doubt on the effectiveness of the proposed rule
Why are YSP’s so hard for the Fed to wrap their heads around? Why wouldn’t a consumer want to now if the rate they were being sold was yielding a cash rebate they could use to pay for some or all of their closing costs?
Talk about stating and regurgitating the ridiculously obvious…nice job Fed but I think K-Fed could have done just as well.
‘The Final Rule’ might have been effective and saved billions if it was implemented 3 years earlier, instead of 14 months from now…When will the Fed get in the trenches and adopt pro-active, preemptive practices instead of post mortem autopsies?
The real trick to creating worthy mortgage reform would be getting a bunch of smart, industry savvy yet non-partisan professionals sequestered from the special interest groups and bank lobbyists. Let them spend 60 days cranking out logical, practical, enforceable policies coupled with easy to read documents. I think everyone would be surprised at the outcome…which would surely be far superior than the lip-service above.
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