Federal Reserve Unveils Proposal To Tighten Mortgage Lending Standards

WASHINGTON (Dave Clarke) - Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.

The rule, which is required by the Dodd-Frank financial reform law, is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.

The rule would establish minimum underwriting standards for most mortgages and lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan.

The law does provide protections from this type of liability if a loan meets the specific standards that are part of a "qualified mortgage."

In its proposal, the Fed is seeking comment on two possible ways of defining a qualified mortgage.

Under the first scenario the loan could not include interest-only payments, a balloon payment and regular payments could not result in the principle of the loan increasing.

Under the alternative, the loan would have to meet all the standards laid out under the first option and meet additional requirements such as having the lender verify a borrower's employment status and debt obligations.

The proposal lays out a general standard for complying with the rule, including verifying a borrowers income, their employment and the amount of debt they have.

Mortgage originators who serve rural and underserved areas would be allowed to give out loans with balloon payments.

"This option is meant to preserve access to credit for consumers located in rural or underserved areas where creditors may originate balloon loans to hedge against interest rate risk for loans held in portfolio," the Fed said in a statement.

The Fed is seeking comments on the proposal through July 22.

The final rule will be implemented by the Consumer Financial Protection Bureau, which opens its doors on July 21.

(Reporting by Dave Clarke and Corbett B. Daly; Editing by Neil Stempleman and Tim Dobbyn)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[joeisright]

08:30 AM on 05/07/2011

Fannie Mae mortgages issued to those who couldnt afford them at the demand of DEMOCRATS bundled as government guranteed securities and sold by the suckers on Wall Street caused the downfall of the realestate market and the destruction of our economy!

DEMOCRATS created Fannie Mae
DEMOCRATS (ex-Clinton cronies) Raines and Gorelick ran FANNIE MAE
DEMOCRATS were the biggest recipients of politiical kick baks (Chris Dodd, Barney Frank AND OBAMA!)

But hey, let’s belive DEMOCRATS and not the very WORDS OUT OF THEIR OWN MOUTHS:
DEMOCRATS AND FANNIE MAE:

[Peter007]

08:23 AM on 04/30/2011

The Federal Government still wants to be involved in a market or a business. This administration is making it more difficult to own a house. This certainly isn't a good plan when home prices are falling and the housing market is the industry that needs to rebound before there is a recovery. The least that can be said is that the timing was ass-backward.
Past administrations, going back 75 years, have promoted home ownership. That kept prices higher than normal. A neutral position is probable the best postilion. This administration is now punishing home owners . It seems part of their "redistribution of wealth plan."
The next administration will reverse the Obama regulations and we will experience another wild swing in prices.

Its like having a child drive a car. Very fast, stop short, accelerate, stop.
Not a good thing,

[YoBear]

07:28 PM on 04/23/2011

Lots of influences are on the horizon to keep housing prices down. 1) More restrictive lending as suggested here. 2) Fannie Mae and Freddie Mac will stop backing up loans in about two years. 3) There's a bill on the horizon to cap the mortgage deduction at 500K principal balance. 4) Obama has talked of eliminating the housing tax deductions and moving towards a flat tax.

Here are some side effects I see coming: States which generate revenue from property tax will have to figure out how to supplement their tax revenues. The younger generation (or those who plan on buying homes) should benefit as housing prices will remain stable or go down. When people die, their heirs will have houses that are worth less. To oversimplify this, the inheritance passed on to younger children will instead go to younger people in society in general. For people who own homes, no big deal as everyone needs a place to live. For people who own multiple homes (e.g. investments), ouch!

[Peter007]

08:30 AM on 04/30/2011

The policies of the Obama administration will be reversed. Their idea is that less is more. Smaller homes, less consumption, less business, is better.
That philosophy didn't work in East Germany, Cuba, or even China.
Americans will be given a choice of having more or having less, and when they choose more, the Obama socialists will be shown the door just like Jimmy Carter and Gov. Dukukis.

[YoBear]

10:13 AM on 04/30/2011

I had a lot more before Bush took over. Mainly, I had a lot more opportunity. Bush initiated the largest transfer of wealth into the hands of the wealthy. When the Republicans spew rhetoric about Obama being a "redistributionist" it's quite clear to me where the real redistributions happened. But don't worry, soon the US Dollar loses its status as the world's reserve currency, and it will be Bush who history holds accountable. Clinton left office w/ the deficit going down.

[joni brit]

10:58 AM on 04/21/2011

Do not put the blame for this mortgage crisis on the Borrowers. . Audit the REMICS, and then let's talk!!
Banks and Brokers made more money from predatory lending and inflated interest rates than at any time in our history.
These law suits coming from companies like Cambridge Investment, in Massachusetts, who are trying to pin the $2 billion dollars they lost for their investors on the faulty credit scoring of homeowners, is just shifting the blame, again, to the most defenseless. This firm was just at the end of a long line of feeders to the Ponzi that never ends.

[totaldisbelief]

10:08 AM on 04/21/2011

Duh !...ya think.

[Rsmith0087]

09:59 AM on 04/21/2011

Awesome, less competition = more buys for me, thanks obama - cash is king. Atleast he's looking out for someone unlike the stupid GOP - who are only out for themselves

[HockeyMom]

09:21 AM on 04/21/2011

You should be able to buy a house in 102 payments. The extra 2 payments are processing fees. This would be cheaper than the total mess now and allow more people into homes.
Right now a family making less than 50 thousand cannot afford these depressed houses that are available for 35,000, and it should be a time that they jump into the market.

[skjn62]

01:01 AM on 04/21/2011

Sooooo, they want to back to doing it the old-fashioned way........ About time!

[Peanut Santiago]

09:20 PM on 04/20/2011

Really?

They want to make a bank check documents and see if a mortgage borrower can probably pay back the money? The way they did it for years?

How did they come to that conclusion?

And will the Repugs allow so much government interference in business?

Maybe if there were no more bailouts by law.....maybe the banks would wise up by themselves.....

[warren stickney]

09:45 AM on 04/20/2011

Repubs want the free market ya know. To H with the average person. Welfare for Goliath

[wikwox]

07:46 AM on 04/20/2011

Little late, is it not? But I predict the Republican response will be "Communism!".

[Kai-HK]

04:47 AM on 04/20/2011

Fantastic. Good to see action finally taken on the root cause of the housing crisis, poor lending standards as advocated by the government. Now, if the Fed would only remove the second reason for the housing bubble, cheap credit which causes asset bubbles.

Kai

[logicanada]

06:54 PM on 04/19/2011

I'm for cancelling All credit world wide. Wipe the books clean. Only 1% of people will suffer because of it. 99% will benefit.

[AngelaQuattrano]

01:35 AM on 04/20/2011

The word is "Jubilee".

[logicanada]

06:44 PM on 04/19/2011

We've proposed unveiling the idea of proposing that maybe we should unveil a plan to consider whether we should begin to think about talking about proposing some kind of stop-gap measure proposal so that people can see we're doing some proposals about not letting them borrow unless they can unveil to us that their financial standings are within the diametric body of the proposal we intend to unveil.

[Realtors Are Liars]

06:50 PM on 04/19/2011

There's an easy way out of this.

LET PRICES COLLAPSE. Once that happens, the longest mortgage you'll ever need is 5 or 7 years.... just like the old days.

[wdw808]

12:51 AM on 04/20/2011

a price reset........sounds good

[totaldisbelief]

10:10 AM on 04/21/2011

call a meeting ...I'll go get the doughnuts

[BonnieDoon]

06:28 PM on 04/19/2011

“Letting the Banks Off the Hook”


Once again, on the money analysis by Joe Nocera at the NYT 04-18-2011:

http://www.nytimes.com/2011/04/19/opinion/19nocera.html


“By jumping out in front of the attorneys general, the O.C.C. has made the likelihood of a 50-state master settlement much less likely. Any such settlement needs bipartisan support; now, thanks to the O.C.C., there’s a good chance that Republican attorneys general will walk away. The banks will be able to say that they’ve already settled with the federal government, so why should they have to settle a second time? If they wind up being sued by the states, the federal settlement will help them in court.”

““It’s a vintage O.C.C. move,” said Prentiss Cox, a law professor at the University of Minnesota who was formerly an assistant attorney general. “It is clearly an attempt to undercut the A.G.’s””

“Old habits die hard in Washington. The O.C.C.’s historical reliance on pre-emption should have died after the financial crisis. Instead, it’s merely been disguised to look like a settlement.”