Lending
Fed Approves Plan to Curb Risky Lending
The Federal Reserve on Tuesday proposed new rules intended to protect would-be home buyers from unscrupulous lenders and, in a sense, from themselves.
Reacting to the crisis spawned by the proliferation of subprime mortgages to people who could not afford them, the Federal Reserve Board voted, 5 to 0, to endorse several protections for those thinking of getting “higher-priced mortgage loans.”
In general, the rules are meant to deter unscrupulous lenders from persuading people that they can afford loans that ought to be out of their reach. By extension, the rules are also intended to keep would-be buyers from deceiving themselves about the debt burdens they can shoulder.
“Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy,” Fed Chairman Ben S. Bernanke said. “We want consumers to make decisions about home mortgage options confidently, with assurances that unscrupulous home mortgage practices will not be tolerated.”
Details of the proposed rules, which could take effect next year after a period for public comment and possible revisions, can be read on the Fed’s Web site, www.federalreserve.gov. What the Fed termed the “four key protections” are these:
Creditors would be barred from lending without documenting a borrower’s ability to repay the loan. Creditors would have to verify a borrower’s income and assets. Prepayment penalties would be restricted. Finally, creditors would have to establish escrow accounts for taxes and insurance.
“Unfair and deceptive practices have harmed consumers and the integrity of the home mortgage market,” said Fed Governor Randall S. Kroszner. “We have listened closely and developed a response to abuses that we believe will facilitate responsible lending.”
What the Fed has been hearing in recent months is a complex blend of personal hardship and dire news for the nation as a whole, as waves of foreclosures have swamped the housing market and threatened to mire the economy in a recession. The housing boom of the first several years of the decade seems almost as distant as the boom in technology stocks — but economists have warned that the fallout from the housing slump could be much worse than that from the “dot com” bubble.
Many home-buyers whose little slice of the American dream has turned into a nightmare were undone by “teaser rates” dangled in front of “balloon mortgages.” When the tempting original rates were supplanted by much higher rates built into the loan, many homeowners could not make the monthly payments.
But those personal misfortunes — whether the result of individual misjudgment, excessive optimism, shady lending or all of those — have mushroomed into a national problem, further complicated by the packaging and reselling of mortgages in ways that are so arcane that even some bankers acknowledge they are befuddled by them.
(Published by Times Online, December 18, 2007)