| Risky Mortgage Lender Problems |
| By Credit Federal |
Published
12/19/2007
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Home Loan
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Mortgage Lenders Face Loan Approval Problems
The Federal Reserve, acknowledging that home mortgage lenders aggressively sold deceptive loans to borrowers who had little chance of repaying them, proposed a broad set of restrictions Tuesday on exotic mortgages and high-cost loans for people with bad credit.
The new rules would force mortgage companies to show that customers can realistically afford their mortgage loans. They would also require lenders to disclose the hidden sales fees often rolled into interest payments, and they would prohibit certain types of advertising.
Borrowers would be able to sue their lenders if they violated the new rules, though home buyers would be allowed to seek only a limited amount in compensation.
The new regulations, expected to be approved in close to their proposed form after a three-month period for public comment, amount to a sharp reversal from the Fed’s longstanding reluctance to rein in dubious lending practices before the subprime market collapsed this summer.
The proposed changes, which do not apply to standard mortgages for borrowers with good credit, stopped short of banning all heavily criticized practices in subprime lending and did not go as far as many consumer groups had sought. But they won praise as worthwhile steps from some industry critics who had long complained that the Federal Reserve under its former chairman, Alan Greenspan, persistently ignored signs of trouble.
If the measures had been in place earlier, they would have applied to as many as 30 percent of all mortgages made in 2006.
Federal Reserve Chairman Ben Bernanke appears to be willing to go much further than his predecessor, Alan Greenspan, in cracking down on shady home-lending practices.
Bernanke and his colleagues endorsed a broad plan on Tuesday to give home buyers new protections against dubious practices in their most sweeping response to a mortgage meltdown that has forced record numbers of people from their homes.
The Fed has been under attack for not doing more to stem the crisis as hundreds of thousands of people lost the roof over their head. The situation raised the odds the country will fall into recession, unhinged Wall Street, racked up multibillion-dollar losses for financial companies and resulted in political finger-pointing over who was to blame.
The proposed rules, endorsed by the Federal Reserve Board in a 5-0 vote, would crack down on a range of shady lending practices that has burned many of the nation's high risk, "subprime" bad credit borrowers - those with spotty credit or low incomes - who have been hardest hit by the housing and credit debacles. The rules also would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers.
Meanwhile, the nation's largest subprime lender; Ameriquest Mortgage Co, agreed to a $325 million settlement, with $295 million allocated for restitution claims to eligible borrowers.
Refunds were available to people who, from 1999 through 2005, were customers of Ameriquest Mortgage Company, Town and Country Credit Corporation and AMC Mortgage Services. AMC previously was known as Bedford Home Loans.
The settlement resolved allegations that the companies did not adequately disclose the terms of home loans, among other things.
The Federal Reserve, criticized for standing aside as risky subprime mortgage lending soared then crashed, did an about-face Tuesday by proposing sweeping new consumer protections.
The Fed proposals would cover tens of thousands of banks and non-bank lenders, mortgage brokers and mortgage-servicing companies. They would rein in the dicey policies of some lenders, such as approving "no-document" loans based on stated income and penalizing borrowers who repay loans early.
Such loose standards led to surging foreclosures, forced scores of subprime lenders out of business, threw the housing market into recession and sparked a credit crunch as financial firms that bought bonds backed by the loans were stuck with sour investments.
But the proposals go well beyond the 20% of the mortgage market that is subprime, loosely defined as higher-cost loans to borrowers with poor credit. The Fed would tighten rules covering advertising, servicing and appraisals for conventional mortgages, too, affecting all home buyers.
Consumer groups, which have pushed the Fed and other regulators for years to take a tougher line, generally said the rules fell short and expressed concern that business groups would embrace the Fed plan as a way to head off tougher proposals by Democrats.
U.S. homeowners increasingly failed to keep up with their home loan payments in November, as the number of foreclosure filings surged 68% nationwide compared with the same month a year ago, according to a mortgage research company.
In all, 201,950 foreclosure filings were reported last month, compared with 120,334 in November 2006, Irvine-based RealtyTrac Inc. said Wednesday. Last month's filings fell 10 percent from October's 224,451. The last time there was a sequential drop in foreclosure filings was between August and September, when they fell 8 percent.
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