Fed Restrictions Make Loans Tough

As a result of the recent sub-prime mortgage scandal, the Federal Reserve has taken many actions to avoid a global credit crisis, which it now aims to further mitigate through tightening the standards that lenders use to determine whether a potential borrower is eligible to receive a mortgage loan. Chairman Ben Bernake has stated that more rigid restrictions would "promote responsible lending," even as 2 million Americans with sub-prime predatory loans will likely default over the next year, furthering the housing slump.

The first area in which restrictions have been made is on the borrower's end. Now, all lenders must ask prospective borrowers to prove that they have an income, or that the assets they rely upon to be able to pay off the loan under the terms agreed by the individual contract are soluble. The lender or creditor is now required to verify this income, and must also consider each borrower's ability to pay off the loan from other assets besides the value of their home. Furthermore, each new borrower is required to set aside other funds, specifically earmarked for property taxes and for homeowner's insurance. These funds are to be kept in escrow accounts, established by the creditor. These new rules are a drastic change in policy for the Fed, as they generally have not taken any actions towards adjusting lending responsibility, instead using their powers to control interest rates and try to ease economic hardship through making borrowing in general cheaper.

Another area in which the Fed has taken regulative action involves the advertisements used to lure potential homeowners to buy. No longer can "deceptive or misleading" ads be used. Though the wording in this instance is vague, they do provide some examples. The rate for a loan cannot be stated to be "fixed" if it can change, for example. Also, brokers are unable to encourage or coerce a home appraiser into artificially changing home prices. This means that the housing bubble is less likely to inflate by a similar proportion in the future, thus limiting potential losses from another such crisis if it were to arise. Creditors are also now required to list all rates associated with a mortgage in an advertisement "with equal prominence as [their] advertised introductory or 'teaser' rates."

The last section of the market to be adjusted involves servicing practices that have often contributed to the record mortgage defaults seen recently. Now, payoff statements are required more regularly, and must reflect all payment received by the lender. This regulation is designed to respond to the often problematic statements issued by lending companies to many sub-prime borrowers. Many mortgage balances would not reflect real payments, and fee notices would often fall through the cracks, building up until, finally, the borrower is financially overwhelmed all at once and cannot make repayments, thus losing their home. Repayment penalties have also been slightly adjusted, such that now penalties must meet the condition of expiring sixty days before the lender can increase the required mortgage payment. Each of these measures is designed to ensure that the days of predatory lending are over for now.

By: Dane Smith