Recently, the US Federal Reserve moved toward taking some form of action against the mortgage crisis hitting many Americans today. In most cases, many people are saying it is “too little too late”.

The rules that the Federal Reserve endorsed with a 5 to 0 vote would in fact help homebuyers of the future not fall into the trap that millions are in today. However, those in trouble now may not see any help for their pain.

A look back before moving forward

During the time period of 1997 and 2006 prices for homes across America increased around 125%. With easy credit terms, laxer lending practices, and an appreciating housing market brought many people forward searching for the dream of owning their home. This meant that low income or those with bad credit history could in fact find a lender to give them a loan. The problem is many did not pay close attention to the type of loan or were in fact, talked into the loan with low teaser rates, which would change from a fixed rate to an adjustable rate mortgage in a few years.

At the time, lenders were not too worried about foreclosures, as they knew with the housing market up; the homes would still be able to sell while making a hefty profit.

During 2006, according to a NPR report, 20% of all mortgages in the US were subprime (low-income – bad credit history) borrowers. Nearing the end of 2006, the real estate bubble was beginning to deflate. Interest rates were on the rise and many of these borrowers were under the gun to make their payments on time, many falling behind. Along with this, homebuyers were beginning to see their loans were more than their house was actually worth due to decreasing home prices.

July to September 2007, consumers were hit hard. The Associated Press estimated that close to 500,000 homes were subject to foreclosure.

What caused these problems?

Unethical lending disclosure practices by mortgage brokers and lenders by presenting to homebuyers loan packages that looked like a wonderful deal on the surface with repercussions on down the road with consumers hit with an adjustable rate mortgage, which increased their monthly payment to beyond their means. In most cases, the change in their loan was not disclosed along with other “hidden” or non-disclosed fees.

Greed was another factor. Lending companies were not concerned if their borrowers could not pay back their loans as home prices were out of sight, and they knew they could sell the home again if they foreclosed and still make a large profit.

What the Feds endorse

The vote in December of the Federal Reserve would crack down on a range of unethical lending practices. The new rules for lending practices would also restrain misleading ads for various types of mortgages and strengthen financial disclosures to borrowers.

Federal Reserve Chairman Ben Bernanke stated, “Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole. They have no place in our mortgage system,” and went all to say, “We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated.”

If and when this plan is adopted it will only apply to new loans from all types of lenders including banks and brokers, however, it will not cover any loans created prior to this new plan.

Some of the facts in the plan include:
• Limit lenders from penalizing homebuyers who pay loans off early
• Require lenders to ensure the homebuyers have set aside money to pay for taxes and insurance
• Stop lenders from making loans without proof of the homebuyers income
• Forbid lenders from engaging in the practice of lending without bearing in mind a homebuyers ability to repay a home loan from other sources besides that of the value of the home.
• Prohibiting certain types of misleading or deceptive advertising for home mortgages (meaning the term “fixed” unless the loan is fixed for the entire life of the loan agreement)
• Require lenders to provide financial disclosures to borrowers (Lenders will not be able to charge fees except for a fee to obtain a credit report)
• Barring lenders from paying mortgage brokers a fee that is above the amount the homebuyer agreed to pay in advance

The House of Representatives has passed legislation that is tougher than what the Federal Reserve is planning, but is similar in a few aspects. All that the American people can do now, is to sit back and watch what can be done to aid those wishing to purchase homes and what will be done to help those that are in danger now of losing their home.

This entry was posted on Saturday, January 5th, 2008 at 9:56 am and is filed under San Diego Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.