The Truth in Lending Act (TILA) offers the Fed some say in mortgage regulation. Indeed, the Fed is changing parts of TILA’s regulation Z in order to curb some of the practices that led to the current subprime mortgage mess (and contributed to the current wider economic troubles). Bloomberg reports on the thrust of the Fed’s new rules concerning subprime mortgage loans:

The Federal Reserve proposed new rules for subprime mortgages, including a ban on low- documentation loans and limits on penalties for borrowers who prepay their debts. …

Board members unanimously voted in a hearing today to make lenders responsible for determining whether borrowers can afford their mortgages even after low starter rates expire.

Lenders will now be required to document borrowers’ income, as well as determine whether they can make payments after a mortgage rate reset. The ideas is to force lenders to make mortgage loans only to those who can actually pay them — and prove it.

Additionally, the new Fed rules on subprime mortgage loans require that pre-payment penalties be limited. Pre-payment penalties are favorite tools of subprime lenders, since it precludes the borrower from getting out of the bad loan if his or her economic situation improves, or if he or she wants to refinance to a better loan.

Not everyone is happy, though. Some feel that the Fed didn’t go far enough in fixing the subprime mortgage mess. And, of course, this won’t unilaterally fix the economy. However, I feel that the Fed got this one right (unlike the cash liquidity plan). It places a measure of responsibility on the lenders by forcing them to carefully evaluate borrowers. Many people who should never have gotten mortgage loans in the first place would not be facing foreclosure right now if lenders knew they would be in trouble for making the loans.

Besides, borrowers need to take some of the responsibility, too.

Tags: subprime mortgage mess, subprime mortgage, home mortgage loan, mortgage loans,
Fed rules subprime mortgage, mortgage lenders, mortgage news

One of the most venerable home mortgage loan programs is the FHA home loan program. This program, administered through the Federal Housing Administration is designed to help homebuyers get approved for better loan terms. Now, with the current housing downcycle making things more difficult in terms of lending, and would-be homebuyers wary, the Mortgage Relief Act just passed by the House is changing some of the FHA home loan rules.

The new rules have lifted the ceiling on loan amounts in the program to $417,000. This means that homes in higher-priced markets can be bought using the FHA home loan program. Additionally, things are made easier for homebuyers with the new rule that reduces the amount required for a down payment. Now, instead of a 3% down payment, one only needs 1.5% of the home purchase price as a down payment.

A Sedona real estate blog points out that, even with the new rules, there are still caveats to the FHA home loan program:

However, FHA home loan rules do require that you have reasonably good credit, and a down payment is still necessary.

Your debt-to-income ratio will also be examined before you are approved for the FHA home loan program. The nice thing about the restrictions of the FHA home loan is that buyers using the program are much more likely to see their loans through, since the requirements demand a certain level of financial solvency and creditworthiness. Additionally, it prevents many homebuyers from getting homes that they cannot afford, since the interest rate is a fixed rate, and the mortgage is usually a traditional mortgage. No artificially tinkering with the debt-to-income ratio by giving a loan with a teaser rate, or an interest only loan.

While the new FHA rules are unlikely to help those facing foreclosure, they should help those buying a new home, especially first time homebuyers in high priced real estate markets.

Tags: FHA home loan, new FHA rules, home mortgage loan, mortgage loan blog,
Mortgage Relief Act, FHA home loan program

The stock market is down today as credit ratings remain in doubt over losses related to the subprime mortgage crash. Additionally, Alan Greenspan is warning of a possible recession, and that isn’t helping the stock market, either.

MarketWatch reports on the stock market:

U.S. stocks on Monday extended losses into a second day as Moody’s Investors Services warned it could lower bond insurer credit ratings because of subprime losses and Alan Greenspan warned of a possible U.S. recession.

The subprime mortgage crash continues to affect the economy, even as Congress works to change FHA mortgage loan rules and the Bush Administration tries to stem the tide of expected foreclosures with a five year mortgage freeze.

Most of these fixes, however, are only band-aids. The new FHA mortgage loan rules will mainly benefit first time homebuyers and will do virtually nothing for those faced with foreclosure. Additionally, attempts to fix the economy with increased liquidity, bailout plans and mortgage rate freezes will not hold up in the long term.

Right now, real estate investing should be something to be wary of, as well as investments in real estate related industries like mortgage lending and building. Some stock investments are available at bargain prices, but it is important to choose carefully; while some stocks will recover and you could see great returns by investing now, others will not recover.

And it is worth noting that many do not feel that U.S. housing prices have bottomed yet, so real estate flipping is not the best idea right now, and waiting until next year to buy real estate may be a better idea. Bloomberg reports on the housing market and the economy:

“We’re only halfway through the housing shock,” said Ethan Harris, chief U.S. economist at New York-based Lehman, the fourth- biggest U.S. securities firm by market value. “It’s just a matter of time before the weakness spreads to the rest of the economy.”

Tags: subprime mortgage, mortgage news, FHA mortgage loan, FHA loan rules,
mortgage blog, mortgage rate freeze, stock market