Wednesday, December 19, 2007

Are Fed's proposed ideas to regulate lending industry any good? Actually... maybe

The Federal Reserve is proposing numerous changes in lending practices to cut down on questionable underwriting and protect people from lenders, and quite frankly, themselves. Most of the ideas make sense, but they are dependent on implementation and then enforcement. The key topics are as follows, along with my thoughts, of course:

Prohibit giving people unaffordable loans.

This has good intentions as the jist of it is to qualify buyers' affordability based on the reset rate of an ARM, and not on the teaser/introductory rate. Now, my question is what are they going to consider the threshold of "affordability" and will it be an appropriate benchmark? Reserving final judgment for that.

Restrict use of "liar" loans.

I have mixed feelings on this as it will do some good and some harm to unintended recipients. Yes, many buyers used this product and gladly paid the slightly higher rate to get more house than they should have during the boom. But this product is also the only option for many newly self-employed professionals, so this could cut many of them out of the picture unintentionally. Again, good intentions by the Fed with this.

Prohibit or limit prepayment penalties.

This is a no-brainer and good for all buyers and owners. Just another clause that guaranteed higher fees or a prolonged higher rate for lenders.

Curb or better disclose broker incentives.

Another strong proposal from the Fed, if implemented this should prevent or limit brokers from increasing your rate above what you should qualify for. This is a direct attack on what is known in the mortgage industry as the "yield spread premium" - fairly self-explanatory - and pays said broker a nice premium for jacking up your rate.

Require or encourage escrowing of taxes and insurance.

Not a terrible idea, but I am one who does not like to give anyone an interest-free loan at any time, and that is what this is. My simplified take is this: if you are responsible enough to be able to purchase a home - and assuming all of these other rules whittle that down to a qualified pool - then you should really be able to manage your finances and pay your insurance and taxes when they are due, no matter when that is.

Prohibit coercion of appraisers.

This one has been attacked already in California with the passing of SB223 in November, making it a federal crime to coerce an appraiser. Might as well make it a national/federal crime.

Prohibit loan servicers from engaging in unfair practices.

This deals with the administrative angle and general customer service. Basically, credit the customer's account the day the payment comes in, and don't double- and triple-charge for the same late fee more than once. Wait... is this a wireless phone bill we are talking about? Next.

Require better disclosure overall.

Though vague and generalized at this juncture, this is a necessary attack on the incomplete and misleading mortgage advertisements we have all heard, seen, or read. If you have ever turned on the radio in the Bay Area, you most certainly should have heard Wesley Hoagland of Lenox Financial touting his 1% loans with no closing costs, free appraisals and the fact that it is "the biggest no-brainer in the history of mankind." Seriously.

These proposed changes are apparently open to public comment for 90 days, at which time the Fed will review comments and then make decisions on implementation. Overall, I have to say it's a good start, but it's too little too late for this phase of the real estate cycle/credit meltdown. They are basically working on what will transpire in 5-10 years from now.

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