Mortgage defaults and rising foreclosures are among many troubling headlines in our economy, but can subprime lending problems really be the cause behind all these trends.
Amidst the clamor over mortgage and world financial markets, IndyMac failing, Fannie and Freddie woes, GMC layoffs, and the debate on the housing bill, the Federal Reserve Board approved the final rule for home mortgage regulations.
The final rule establishes a category of high priced loans and offers consumer protection for loans in that category.
•1. Must base lending decision on borrower income and assets
•2. Income and assets used to qualify must be documented
•3. Prepayment penalty ban if rate can change within 4 years, maximum PPP term for all loans is 2 years
•4. Require taxes and insurance escrow
Additional provisions target early disclosure of fees, coercion of appraisers, loan servicing issues, and misleading advertising practices.
High priced loan will be loans with an APR 1.5% for first mortgage loans, and 3.5% for second mortgage loans, above the Federal Reserve Board "average prime offer rate."
Yield spread premiums are left in place, as consumer testing of proposed disclosures proved confusing. Yield spread premiums remain a high profile target of consumer groups and regulatory agencies. Expect more efforts to be made to distinguish between "legitimate payments to brokers and fees intended to land a borrower in a higher-cost mortgage."
The Federal Reserve and HUD will continue to review premium payments, as well as state auditors in Tennessee.
These issues are receiving impetus because of the current mortgage market crisis. Subprime lending practices are receiving the brunt of the blame for the mortgage defaults, but is that proving to be an accurate assessment?
The market itself has already accomplished most of these reforms.
The larger issues in the economy surely could not have been caused by subprime mortgage foreclosures. FHA , Fannie Mae, and Freddie Mac are all suffering losses. Recent events with IndyMac have raised concerns there are more bank failures possible. Credit card and student loan defaults are on the rise. The list could go on. Bad subprime loans did not cause all this, I do not think.
The subprime mortgage problems may have been the first sign, and not the cause, of more fundamental economic problems. Recent prominent layoffs and increasing oil prices are not good news. A headline today mentions that TN state revenues are in decline. TN has no income tax and relies heavily on sales tax for revenue.
Everyone keeps talking about abusive practices and bad loans, but these do not explain defaults in FHA and conventional mortgages.
Richard Smith
Home financing in Tennessee, Georgia, and Alabama.
Experience matters when it is your home loan.
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Richard Smith Conventional, FHA, FHA 203k, HUD $100 down purchases, VA, Jumbo VA, Rural Development, Jumbo, FannieMae Homepath, Home Equity Line of Credit (HELOC). |
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It is a shame to see the number of foreclosures in todays market. With rising fuel cost, it is hard for some families to make ends meat.
LOANS GOING BAD ARE A SYMPTOM OF A LARGER PROBLEM- I THINK THER OTHER SHOW WILL FALL---SOON.
KEEP ON BLOGGING
BILL
Roland,
Buyers that I see are expecting to purchase a foreclosure at a great price - and of course without impacting the overall market values. they are not buying anything at "market" but will wait to buy the right foreclosure.
I still do not understand the number of foreclosures. They are not all 2/28 loans with 5% prepayment penalties.
Richard
Bill,
I hope that other shoe is not too big, but I think you are right.
Richard
Hi Richard , my first comment just went away again and so here is a redo as best I can re-fabricate it.
I do believe we are in an unusual position and it would appear that this is being driven and as you say, the subprime crisis is just the beginning and the reactions of investors indicate that they have much bigger concerns. I think our veracity is definitely being challenged and I am not all that confident we will meet the challenge. Investors world wide, may be calling the note. DUE ON RECEIPT.
William,
I hate when something knocks out that perfect first draft. I have to re-learn every day to copy before posting, to write in word first. Maybe someday it will be a set habit.
Please let me know what you think of the photoless background.
About the post, I have not heard anything about what kinds of conventional loans are in default. I hear bad loans were made, but then they speak of no income documentation, high adjustable rates, prepayment penalties. These are not conventional or FHA.
I hear about the GSE's needing reform, but not specifics on what needs to be changed.
What is causing the losses in conventional loans. Are the automated underwriting models wrong? If the economy is just bad, then what reform is needed? Were the basic guidelines too loose for DTI and credit? Are the losses limited to specific regions?
Subprime and Alt A are on one side of the issue. Understand, risky loans.
Conventional is on the other side. Should not have been risky.
What happened?
Richard