Fed Expected to Tackle Abusive Mortgage Practices

December 17, 2007 No Comments »

Tomorrow, the Federal Reserve will propose a series of tough rules for mortgage lenders as part of their strategy to curb abusive lending practices.

Although the proposed changes haven’t been released, Fed chief Ben Bernanke wrote Friday that officials “will attempt to adequately protect consumers while maintaining responsible lending markets.”

It is widely believed that the Central Bank will target a series of changes that similar bills have already addressed.

In an effort to better reflect a borrowers’ ability to repay a loan, the Fed is expected to suggest that lenders base qualification on higher reset rates, and not initial note rates, teaser rates, or interest-only payments.

This move could help curb the record number of foreclosures ravaging the nation, and cut down on the surge in loan defaults as well.

The Fed will probably also look to prohibit or limit the use of prepayment penalties, similar to what the state of Colorado enacted Friday.

Additionally, the Central Bank will likely restrict the availability of stated income loans, referred to as “liar loans,” to prevent homeowners from ending up in mortgages many could never actually afford.

The issue of yield-spread premium will also be addressed, though it’s unclear if the Fed will propose better disclosure or attempt to overhaul the practice altogether.

Lastly, the Fed is expected to push for improved disclosure overall, forcing lenders to include taxes and insurance in the total cost of a loan, and also suggest that these fees be escrowed.

All in all, the Fed changes seem to mirror those of recent bills proposed by the House and the Senate, and will likely face criticism for failing to act sooner.

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