Wednesday, July 16, 2008

New Mortgage Regulations Come Just A Tad Late

The Fed approved some new measures Monday meant to crack down on what they deem to be deceptive lending practices. Because most of these problems have already worked themselves out, thanks to the whole credit crisis thing going on, these measures likely will have little impact. But just for fun, let’s take a look at what the changes are.

The following summary was collected from the San Francisco Chronicle:

Rules for all mortgages

- Prohibit creditors and mortgage brokers from coercing appraisers into misstating a home's value.

- Require additional information about rates, monthly payments and other loan features in all advertising.

- Ban seven deceptive or misleading advertising practices, including calling a rate or payment "fixed" when it can change.

New lending rules

- Force lenders to consider a borrower's ability to repay loans from income and assets other than the home's value.

- Require lenders to document a borrower's income and assets.

- Ban penalties for borrowers who pay off loans early if the payment can change in the first four years. In certain cases, a prepayment penalty period can't exceed two years.

- Mandate that creditors ensure certain borrowers set aside money to pay for property taxes and insurance by establishing escrow accounts.

The “new” rules for all mortgages are welcome additions, I guess, and really should be no brainers. I’m pretty sure coercing appraisers into misstating home value was already a no-no, but now it is “official,” for whatever that’s worth.

The new subprime lending rules are, for the most part, already being followed. At this point in time a borrower is going to be hard-pressed to get a loan if they can’t document their income (unless they are putting down a large down payment). Also, on almost all loans now--and in recent memory--lenders have required escrow accounts to pay for taxes and insurance. Since this was the norm even during the subprime heyday, I’m not sure exactly what they were trying to accomplish, but I guess we can now use that “official” word again. The biggest change that I can see is with the pre-payment penalties. In the past, having a two year pre-payment penalty was pretty much the norm, and borrowers who wanted to get that waived had to buy it off. From the lender's perspective it made complete sense: They wanted to ensure that they were able to make at least X dollars on the loan even if the borrower sold the house the next day. This is one that I think could backfire for borrowers. Now that lenders are not going to be able to add a pre-payment penalty, they are going to make the loan more expensive because they have to ensure that they are able to make their profit no matter what the borrowing time frame. So we can expect that buy-down pricing will now be included in every loan--whether the borrower wants it or not. The borrower who knows that they are going to be in the property for at least two years will now have to pay a little more on their loan. I think a better solution might have been to make the pre-payment penalty opt in rather than opt out--that way people who do want it can still have it.

All in all, I think these new regulations were more for show than for function. The government needed to appear like they were trying to do something about the problem, so they put together a list of things that look good on paper, but in practice are pretty much useless.

Labels: , ,

Subscribe to NuWire's free weekly investment newsletter:
  
Your information will not be shared

1 comments:

July 26, 2008 at 11:17 AM Anonymous said...

As someone who sought out and won the right to NOT escrow (and paid $150 for the privilege on a 30-year 5.625% fixed) I am alarmed at losing the power to do this and maybe having escrow forced on me. Debt service (I have a 35-year background in studying corporate debt historically) totals 12x$345.40= $4150 or so annually BUT quarterly taxes and annual insurance total about $2300. I get a discount for paying the insurance all at once and I'm sure the mortgage holder (citicrop) (never sure of who is nortgagor and mortgagee; best way to check is to at a forclosure sale ad!) would like to pay in pieces and stick me with their higher cash flow.
What this means is the escrow is an effective slush fund for the mortgage outfits, and requiring escrows may be a way of helping bail them out. OK, I maintain a large cash position so I can visit city hall on the tax due date and pay them in full (Friday Aug 1, 250 feet away); same with the insurance. Most people aren't so disciplined and I was annoyed that the bankers thought I was a rube like everybody else "building equity" (I bot this place to live in rather than worry about eviction by a capricious landlord). Yes, on an income only basis I can't afford this but I have a huge pot of assets (I don't count capital gains as income except for taxes; capital gains are seed corn for the next deal and I had to sink a lot of seed corn into my condo and I can't get that seed corn out without putting the living place at risk.) I am doing a slow liquidation; fortunately all the numbers worked: I didn't have to sell the crown jewels of the portfolio, got the 60% down payment, and had cash left over to play with outside of the $10-20k cushion I like to keep.
As for the Housing bill about to be signed today 26. July--it is going to be the "Smoot-Hawley Tarriff" of 2008: the pebble that starts the downturn that causes a recession to become a Depression. I've been continuing the net-selling program as I spotted the CDO securitization problem years ago. All because I pay my card bills in FULL each month it made me think of what could happen/go wrong to CMO/CDO cash flows..
Only good feature is that if Obama wins enough people will blame him for the crash, but there are a lot of stupid people out there who always vote Democrat, plus a lot of dishonest ones who do.

Post a Comment

Home

© 2013 NuWire Investor and NuWire, Inc. All Rights Reserved.