Mortgage Standards Reform Proposed to Combat Lender Abuses

Mortgage Standards Reform Proposed to Combat Lender Abuses

The Federal Reserve has proposed mortgage standards reform to combat lender abuses that led to the mortgage crisis. If passed, the rule would require lenders to engage in an 8-point checklist to ensure borrowers can repay the debt and require borrowers to remit a minimum 20-percent down payment when buying real estate.

The mortgage standards reform proposal would hold mortgage servicers accountable for investment decisions and hold borrowers responsible for repayment of debt. The reform also proposes redefining a qualified mortgage and respective underwriting standards. The rule is expected to be implemented by the Consumer Financial Protection Bureau during the 4th quarter of 2011.

Few people would dispute that serious changes need to be made within the real estate industry. In recent months investigations against banks have been initiated by the Justice Department, Federal Housing Authority, Securities and Exchange Commission, Federal investigators, and state Attorney Generals.

Reforming policies that have allowed mortgage lenders to participate in questionable lending practices and improper foreclosure are long overdue. In recent weeks, federal reforms such as the Short Sale Act of 2011 and Regulation of Mortgage Servicing Act have been presented to legislation.

The mortgage standards reform proposal is in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act which was established to ensure borrowers receive adequate information when taking out real estate loans and other types of financing.

While reform is required many real estate professionals are concerned about proposed changes presented in the rule.

Controversy surrounds reform of the Qualified Residential Mortgages (QRM) underwriting standards.

The Atlantic describes QRMs as “loans that meet certain guidelines and allow banks to escape risk retention requirements.” The rule proposes that buyers of real estate will be required to provide a 20-percent down payment to minimize loan default. Federal regulators want to alter QRM standards that not only require borrowers to provide larger down payments, but also pay all closing costs.

Realtors are concerned these changes would lead to a further decline in home sales because of the down payment requirement. Additionally, the proposed 8-point checklist would prohibit countless borrowers from qualifying for a home loan.

To worsen matters for homeowners, legislation has been presented seeking discontinuance of mortgage interest deductions on personal tax returns. This includes interest paid toward home acquisition and home equity loans.

Another concern about proposed mortgage standards reform is the effect it would have on Federal Housing Authority (FHA) loans. This program has been favored since 1913 and is the dominant home loan program. Nearly 60-percent of loans are FHA-insured. The rule proposes limiting FHA lending to less than 15-percent.

Mortgage reform is a catch-22. On the one hand it’s necessary for curtailing future lending crisis. On the other, it places lending restrictions on buyers that can afford loan payments, but unable to save a large down payment.

If lenders adhere to proposed mortgage standards reform there is a chance for positive change within the housing market. However, with tighter lending criteria and larger down payments the market could remain stagnant.

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