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Feds Will Force
Lenders To Ensure
That Borrowers
Can Repay Loans
Lenders To Ensure
That Borrowers
Can Repay Loans
The Federal Reserve has proposed some new mortgage rules. These rules appear
to be common sense, and I am surprised that lenders have to be told how to lend
money. However, during the housing bubble, banks and mortgage companies were
lending mortgage money to anyone with a pulse. As a result of these lax lending
practices many of the loans were not repaid and millions of houses ended up in
foreclosure.
The proposed rule will apply to all mortgage loans with a few exceptions. Those
exceptions are home equity lines of credit, timeshare plans, reverse mortgages and
temporary loans.
The Federal Reserve is open for comments from the public until July 22, 2011. The
Federal Reserve wants lenders to follow specific loan underwriting procedures.
Underwriting a mortgage for the ability to repay.
All information must be verified, especially the following:
Income and assets
Current employment status
Credit history
Current debt obligations
Monthly mortgage payments
Qualified mortgage.
The bank or lender can establish a qualified mortgage and this limits the bank's or
lender's liability and exposure to litigation. The key element to a qualified mortgage is
that the loan must not have certain features. These features include negative
amortization, fees must fall within specified limits, and the loan must be underwritten
using the maximum interest rate during the first five years.
The "qualified mortgage" mentioned here is not the same as the "qualified
residential mortgage (QRM)". With reference to the QRM, the lender must retain
some of the risks associated with loans they repackage and sell to investors.
Balloon payment qualified mortgage.
Lenders operating in rural and underserved areas can create a "balloon payment
qualified mortgage". This move makes credit available to Americans living in rural
communities and at the same time it hedges the risk of the lender against interest
rate spikes.
Refinance non-standard mortgage.
A borrower can refinance a non-standard mortgage with high risk into a standard
mortgage with lower mortgage payments. This option will allow homeowners to
participate in the streamline mortgages if they qualify.
Finally, the proposal will place the Dodd-Frank Act in place limiting the prepayment
penalties on mortgages.
to be common sense, and I am surprised that lenders have to be told how to lend
money. However, during the housing bubble, banks and mortgage companies were
lending mortgage money to anyone with a pulse. As a result of these lax lending
practices many of the loans were not repaid and millions of houses ended up in
foreclosure.
The proposed rule will apply to all mortgage loans with a few exceptions. Those
exceptions are home equity lines of credit, timeshare plans, reverse mortgages and
temporary loans.
The Federal Reserve is open for comments from the public until July 22, 2011. The
Federal Reserve wants lenders to follow specific loan underwriting procedures.
Underwriting a mortgage for the ability to repay.
All information must be verified, especially the following:
Income and assets
Current employment status
Credit history
Current debt obligations
Monthly mortgage payments
Qualified mortgage.
The bank or lender can establish a qualified mortgage and this limits the bank's or
lender's liability and exposure to litigation. The key element to a qualified mortgage is
that the loan must not have certain features. These features include negative
amortization, fees must fall within specified limits, and the loan must be underwritten
using the maximum interest rate during the first five years.
The "qualified mortgage" mentioned here is not the same as the "qualified
residential mortgage (QRM)". With reference to the QRM, the lender must retain
some of the risks associated with loans they repackage and sell to investors.
Balloon payment qualified mortgage.
Lenders operating in rural and underserved areas can create a "balloon payment
qualified mortgage". This move makes credit available to Americans living in rural
communities and at the same time it hedges the risk of the lender against interest
rate spikes.
Refinance non-standard mortgage.
A borrower can refinance a non-standard mortgage with high risk into a standard
mortgage with lower mortgage payments. This option will allow homeowners to
participate in the streamline mortgages if they qualify.
Finally, the proposal will place the Dodd-Frank Act in place limiting the prepayment
penalties on mortgages.
April 19, 2011
