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Federal regulators prepare to tighten mortgage rules

In California, a bill requiring a warning on problem loans is signed

July 09, 2008|Maura Reynolds | Times Staff Writer

WASHINGTON — With a foreclosure rescue bill facing an uncertain fate in Congress, federal regulators are putting the final touches on new rules designed to curb irresponsible mortgage lending and help some struggling homeowners refinance into more affordable loans.

On Monday, the Federal Reserve is expected to require lenders to document borrowers' incomes and verify that they can afford their mortgage payments -- including the higher payments that come when adjustable-rate loans reset.

"These new rules, which will apply to all lenders and not just banks, will address some of the problems that have surfaced in recent years in mortgage lending, especially high-cost mortgage lending," Federal Reserve Chairman Ben S. Bernanke said at a conference Tuesday.

First proposed in December, the measures have been revised in recent months in response to public comment. Fed officials declined to describe the changes, but the regulations also are expected to limit bonuses paid to brokers for making subprime loans and restrict prepayment penalties for borrowers who want to refinance.

Although action from the Fed is imminent, Congress remains divided over how to stem rising foreclosures and deal with escalating costs to neighborhoods and communities.

Congressional efforts are focused on making it easier for borrowers to refinance into more-affordable loans. The Senate is expected to pass its version of a foreclosure prevention bill in coming days, but it differs from a bill already adopted by the House when it comes to specifics including how much relief would be doled out to communities ravaged by foreclosures, and how such relief would be funded.

It remains to be seen whether lawmakers can reconcile their differences, and even if they do, President Bush has said he may veto it.

The administration has expressed doubts about the wisdom of large-scale foreclosure legislation, preferring private sector initiatives to spur refinancings and regulatory measures to prevent future lending abuses.

"Many of today's unusually high number of foreclosures are not preventable," Treasury Secretary Henry M. Paulson Jr. said in a speech Tuesday. "Due to the lax credit and underwriting standards of the past years, some people took out mortgages they can't possibly afford and they will lose their homes. There is little public policymakers can, or should, do to compensate for untenable financial decisions."

Even so, Bernanke said the central bank would proceed with plans to tighten lending requirements for subprime loans, which carry higher interest rates because of the higher credit risk they pose to lenders.

Some of those new rules also may include restrictions on the use of the word "fixed" to describe the rate of a loan that may adjust in the future and prohibitions on brokers influencing the appraised value of homes.

Lenders also may be required to give borrowers at least 60 days before their loan rates reset, a period during which they can refinance without penalty.

Paul Leonard, director of the California office of the Center for Responsible Lending, said that many of the federal rules, as originally proposed, were too weak. For instance, he noted that some of the practices proposed by the Fed would apply only to subprime loans but not to other nontraditional mortgages, including so-called no doc and interest-only loans that also have high rates of default.

"The Fed has the power to regulate unfair and deceptive practices and their opportunity to use this power is long overdue," Leonard said.

"We would like them to be more aggressive in outlawing the reckless practices that got us into this mess in the first place," he said.

On the other hand, the Mortgage Bankers Assn. has expressed concern that the new rules could impose burdensome requirements on lenders that would result in higher costs for borrowers.

MBA senior vice president Steve O'Connor noted that people are already finding it harder to get mortgage loans, and that further restrictions could "deny worthy borrowers reasonable access to credit."

In addition to the Fed action, the Federal Housing Administration announced Tuesday that starting next week it would expand the qualifications for borrowers seeking low-cost FHA-insured mortgages, making them more available in cases where a homeowner is behind on payments or owes more than the home's assessed value.

The new qualifications, first announced in April, would lift the requirement that borrowers be current on their loans for the last six months and would extend the program to borrowers facing economic hardship such as loss of a job or a change in marital status.

"One of the biggest problems we heard about was borrowers who didn't have a perfect payment history prior to the reset," FHA administrator Brian Montgomery said in a conference call with reporters, adding that the new rules would also ease requirements for borrowers with little equity in their homes.

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