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Fed. Changing Lending Rules -
July 13th, 2008 2:36 PM

 On Friday, CNN/Money posted an article about the Federal Reserve Chairman Bernake will be announcing new rules for the mortgage industry on Monday.  These rules are to prevent another mortgage crisis from happening but will do nothing to help the current situation.

The article states the 4 areas will focus include:

To better protect subprime borrowers from getting into loans they couldn't handle, the Fed proposed four new requirements. The rules would:

  • Require lenders to verify income and assets.
  • Prohibit them from engaging in a "pattern or practice" of making loans borrowers can't afford
  • Limit prepayment penalties.
  • Require lenders establish escrow accounts for taxes and insurance.

Recently, NPR had a story about the subprime mess that we are in and their expert stated that sub-prime lending isn't new.  In the 70's and 80's banks would loan money to people with bad credit histories so they could buy a house.  Typically the average default was in the single digits - 3 -5%.

Now banks are seeing sub-prime loans being defaulted at approximately 33% which is one of the causes of the current crisis.

You would think that banks would have a standard rule that verifying income and assets is mandatory when establishing any type of loan but especially a loan that would last 20 - 30 years.  However that wasn't the case a few years ago.  Your loan application could state your profession and you could state what ever salary you wanted without having it verified. 

Of couse looking back it is always easier to see where mistakes were made, however when you are in the midst of making money and everyone else is doing it then making bad choices happen. Shouldn't the Fed have gotten involved then? It seems that they should have had been oversight into what was happening.

I am interested in seeing what the Fed will propose tomorrow with the new rules.  Of course as an appraiser I am sure there will be an impact and curious to see how things will play out.

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Posted by Christine Sweetland on July 13th, 2008 2:36 PMPost a Comment

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