Feds sign off on new predatory lending rules
Saint Paul / Minneapolis, Minnesota: Yesterday, the Federal Reserve signed off on the much anticipated new set of predatory lending rules. While most legitimate lenders, brokers, and consumer groups applaud the action, it is more smoke and mirrors than any true fix. It looks like the government is doing something, but it is more akin to closing the barn doors well after the horses have left.
The new rules will cover only new loans, not previously existing ones. Additionally, the bulk of the rules would have really only effected the short-term lenders who jumped into the over heated mortgage market, caused a lot of damage, and have long since gone out of business and disappeared. Good lenders, following good lending practices will actually see little or no changes to how they operate.
The biggest change is the nationwide elimination for not only brokers, but also banks, of any no proof of income type loans. These loans were highly abused by both bad lenders and borrowers alike. The new rules prevent any lender from making a loan without looking at a reasonable proof of their income and ability to pay back the loan. Unfortunately, many legitimate borrowers (typically the self employed), will now be completely without any home loan options.
Another key point is the requirement of full disclosure of not only the principal and interest payment, but taxes and insurance too. This problem was highly noted in new construction, where builders, using the builders "preferred lender", focused on only the principal part of the payment. Many inexperienced buyers failed to calculate their ability to pay once you added insurance, association dues, and property taxes into their overall housing obligation. This problem really kicked in as many new construction buyers never realized, or were told that typically you only pay empty lot based taxes the first year or so, then taxes sky rocket up as they were now assessed the full improved value of the lot including the home. This could easily have added hundreds of dollars to their monthly payment.
Pre-payment penalties, another highly controversial subject between lenders and borrowers will also be severely restricted, but not eliminated completely. Consumer advocacy groups wanted the penalties lifted altogether. Unfortunately, the side effect is that without the penalties, everyone may now have to pay more.
Finally, the new rules add more teeth to the existing advertising rules which bad lenders completely ignored, and to which the regulators allowed to be abused. Again, looks good in the press, but truely a meaningless action.
(c) Metzler Mortgage Group - www.JoeMetzler.com
Hey Joseph,
Good post, I like the new rules with the new home builders. In my area the homes with a much higher degree of fall out are those purchased within the last 3 years.
Take care!
RJH
It's only taking action now because they were caught with their hand in the cookie jar...do we really think they would be doing this now if things were still cranking? I doubt it.
If they really wanted to help then they should just relieve all people who got loans and let them give back the home with no repercussions but we all know that ain't happening.
Neal, you said "If they really wanted to help then they should just relieve all people who got loans and let them give back the home with no repercussions but we all know that ain't happening."
Were there bad realtors who pushed house people shouldn't have bought? Are there bad builders who didn't fully disclose? Are there bad lenders who bent rules?
The answer to these questions is yes... But the question that people fail to ask is WHERE IS THE BUYERS PERSONAL RESPONSIBILITY?
I had untold numbers of customers DEMAND I put them into a loan I knew they shouldn't have, but yet they qualified to receive.
Untold numbers of customers took out home equity loan after home equity loan and cash out refinances to pay off uncurbed spending on credit cards, take vacations, and roll their car payments into the home...
Everyone (buyers, builders, lenders, Wall Street, banks) was drunk on equity, the possibility of gaining equity, or the so called safety in gaining a "safe" equity position and acted foolishly. Today we all have a hangover.
The bottom line is simply this, no one held a gun to anyones head and forced them to do anything they didn't want to do. Therefore, no bailout to anyone. No bailouts to homeowners, no bailouts to lenders, no bailouts to Wall Street, no bail out to banks.
The market will correct itself, and appears to be doing a pretty good job of it - although it may be another 2-years before it all starts to settle down.