Proposed mortgage lending laws - What should you do?

Federal Reserve Board Considers Mortgage Lending Regulation Changes

By Sharon Secor

Direct Lending Solutions Staff Writer

On June 13, 2007, Federal Reserve Board member Randall S. Kroszner announced that significant changes in subprime mortgage lending regulations were under consideration. There are numerous factors involved in this decision to take a look at lending practices by those who target borrowers with flawed credit. The increasing rate of foreclosures, which is related to the rising interest rates associated with adjustable rate mortgages, or ARMs, is one recent trend that has spurred the Federal Reserve Board into action. There are many consumer advocate groups that are urging the Federal Reserve Board to take action. However, others express concern that tightening regulations could make it harder for those with less than perfect credit to achieve homeownership.

What Is The Federal Reserve Board And What Does It Have To Do With My Mortgage?

The Federal Reserve System came into being in December of 1913, with the legislation for its creation being signed into law by President Woodrow Wilson. The creation of this particular banking system was inspired by repeated fiscal destabilizations and recessions that led to financial panics and bank failures.

What has come to be called the Bankers’ Panic of 1907, the fourth in a series of similar bank panics over 34 years, brought financial chaos to the nation, with the stock market falling by 50% and bank failures moving in a wave throughout the country in a sort of domino effect that began in New York City. The country endured two severe stock market crashes that year, which were the result primarily of top businessmen and speculative investors fighting for position, power and control. The creation of the Federal Reserve was aimed at stabilizing the national economy so that it would not be affected to the same dramatic degree in the future by the machinations of big business.

The Federal Reserve determines the nation’s monetary policy, particularly in the realms of credit, lending, and banking. According to the Federal Reserve (pdf document) , its goals are to “promote the objectives of maximum employment, stable prices, and moderate long-term interest rates.” Regulating banking and lending is said to be one of the tools available to the Federal Reserve to “contain financial disruptions” in hopes of “preventing their spread outside the financial sector”, meaning into the lives of the common person.

The Federal Reserve Board is made up of seven members, each serving a term of 14 years. These terms are staggered, one starting every two years, so that it is not an entirely new set of members every 14 years. The members are appointed by the president, and then must be confirmed by the senate. The Federal Reserve Board of Governors has a variety of responsibilities relating to the nation’s monetary policy, including those aspects of that policy that affect your mortgage.

Not only does the Federal Reserve Board play an important role in determining how much your mortgage, as well as other forms of credit, will cost you, it also is responsible for supervising and regulating banks that are members of the system, which affects the operations of the bank that you do business with. Furthermore, the Federal Reserve Board also serves to regulate consumer credit, influencing important protective federal legislation. The Home Mortgage Disclosure Act, Truth in Lending Act and Truth in Savings Act are examples of the types of consumer protections that the Federal Reserve Board has involvement with.

The Types Of Lending Practices And Regulations Under Consideration For Change

The housing bubble is a phrase that refers to the rise in home prices and what some refer to as an artificial rise in home worth. The creation and growth of our current housing bubble has been fueled, in part, by the loosening of lending to include subprime borrowers, which has allowed borrowers with a much higher chance of defaulting on their loans into the market and has left room for predatory lenders to operate. Another contributing factor has been the popularity of adjustable rate mortgages, which typically have featured a low rate of interest at the start, but as changes in the overall economy have occurred and interest rates increased, ARMs have become increasingly unmanageable for many.

The bursting of the bubble will leave many people holding onto properties that, as the market adjusts itself, will be worth significantly less than what is owed on them and many will be losing the home equity that they were counting on, or worse yet, borrowing on. As the interest rates associated with ARMs, or adjustable rate mortgages, creep upwards, those who bought property counting on the lower interest rate to be able to make their payments are entering into foreclosure at record rates – so much so that some of the top subprime lending companies have been left staggering. In fact, more than 50 mortgage companies have had to file bankruptcy, close down or sell out since the start of 2006.

Because part of the Federal Reserve Board’s responsibilities is to try to mitigate the damage done to the overall economy by disruptions in a particular section of the economy, it should come as no surprise that the Federal Reserve is giving careful attention to the factors that have helped to create the housing bubble and considering making changes to specific regulations that have been deemed to play a direct role in the current situation.

According to a June 13, 2007, report published on MoneyNews.com and a June 14, 2007, article in the New York Times business section, the prime target of the Federal Reserve Board is a type of loan application in which the income is stated by the borrower, but not completely verified by the lender. Other changes may include cracking down on prefatory lending and tightening up lending to exclude those most likely to default – such as those who would face a monthly mortgage payment that is more than half of their income. The Federal Reserve Board is also considering breaking annual sorts of payments, like taxes, into monthly payments, and is taking a hard look at prepayment penalties, which serve to protect the amount of money that lenders receive from interest payments, as the lender receives less if the borrower pays off the debt early.

Refinancing Can Help

Punitive prepayment penalties limit options, often limiting those that would be of great assistance to the borrower. One option that borrowers have available to them is to refinance their loan at a lower interest rate. This is a great opportunity for a subprime borrower who, during the time span between initiating the loan and the present, has been working on improving his credit rating, as he may be eligible for a better interest rate. However, many subprime borrowers have to agree to serious prepayment penalties in order to get the mortgage in the first place, which can greatly reduce or even nullify the benefits of refinancing, and that is why the Federal Reserve Board is considering making changes in regard to this particular matter.

While the Federal Reserve Board is giving serious consideration to making real changes to mortgage and lending regulations, particularly in the subprime market, it is also aware that subprime lenders play an important role in helping people with damaged credit become homeowners. Therefore, the stated goal of the Federal Reserve is to achieve a healthy balance between subprime lending regulation and facilitation, in order to protect the industry and its consumers, while ensuring access to borrowing for those with less than perfect credit.

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