Fed to unveil plan to curb shady home lending practices
The rules to be proposed are especially geared to providing some future safeguards to the riskiest “subprime” borrowers, already painfully stung by the housing and credit debacles. The proposal is expected to apply to new, or future, loans made by all types of lenders, including banks and brokers. The plan could be finalized next year.
The Fed, which has regulatory powers over the nation’s banking system, is considering:
–barring or restricting lenders from penalizing subprime borrowers – those with tarnished credit or low incomes – who pay their loans off early.
–forcing lenders to make sure that borrowers, especially subprime ones, set aside money to pay for taxes and insurance.
–barring or limiting loans that do not require proof of a borrower’s income.
–setting new standards for how lenders determine a borrower’s ability to repay a home loan.
Fed policymakers also will look into improving financial disclosures so people better understand the terms and conditions of their mortgages. It will consider ways to crack down on misleading mortgage advertising.
The Fed’s response has taken on heightened importance given the meltdown in the housing and credit markets that has led to record numbers of home foreclosures. The crisis has raised the odds that the economy might fall into a recession, roiled Wall Street and given Democrats and Republicans much fodder to blame each other.
The plan, if ultimately adopted, offers Federal Reserve Chairman Ben Bernanke, who took over the helm in February 2006, an important opportunity to put his imprint on the Fed’s regulatory powers. Some critics have complained that Bernanke’s predecessor – Alan Greenspan, who ran the Fed for 181/2 years – failed to act as a forceful regulator especially during the 2001-2005 housing boom, where easy credit spurred lots of subprime home loans and many exotic types of mortgages.
When the housing market went bust, the carnage was the worst in subprime loans.
Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72 percent entered the foreclosure process during those months. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.
When home values weakened, borrowers were left with loans balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.
On the Net:
Federal Reserve: http://www.federalreserve.gov/