The new protections (from the Fed’s site):
[ul]
[li]Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan.[/li][li]Creditors would be required to verify the income and assets they rely upon in making a loan.[/li][li]Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase.[/li][li]Creditors would have to establish escrow accounts for taxes and insurance.[/li][/ul]
I wonder what this is going to mean for people who are self-employed or for other reasons have trouble documenting their income. Are they now going to be unable to get a mortgage, even if they could pay one?
Are lenders going to have to consider whether a borrower can still afford an adjustable-rate mortgage if and when the rates go up? If so, what’s going to happen with people who plan on their income going up to cover that sort of thing? Is this going to make house-flipping less attractive (since people won’t be able to get a teaser rate that won’t expire until after they’ve sold the house)?
I’m all for a ban on prepayment penalties. I’m against those on principle- you shouldn’t be penalized for paying off your loan sooner than it needs to be. I would prefer the outright ban on prepayment penalties that some Democratic Congresspeople have proposed.
I think the escrow accounts for taxes and insurance (this is PMI, right, not homeowners insurance?) are a good idea, too. But that’s just because I’m lazy and like the idea of the bank handling stuff so I don’t have to.
I detest the idea of escrow accounts for taxes and insurance being a requirement. We pay our own precisely because both our daughters’ families were screwed when the bank messed up and didn’t pay on time. The penalties and fees fell to the borrowers, not the bank.
You’d think that sort of thing would be relatively uncommon- it’s not that different from something like online bill payments, and lots of banks do that.
It looks reasonable to me. Those were pretty much the rules the last time I got a home loan. On the prepayment penalty issue, I made certain my loan had NO penalties at all, and made them point out the part of the loan paper that spelled that out. And I was able to escape the escrow requirement by making a sufficient down payment (20%). Of course, that was back in 1985, and the interest rate on a fixed mortgage was something like 12.5%.
It probably is uncommon. But one aw-shit wipes out a thousand atta-boys. It will happen just when it will hurt you the most, if Murphy follows you as he does us. At any rate, I hope our mortgage will be grandfathered. Or will the new rules be retroactive?
I understand the appeal of non-documented loans for the self-employed (seeing my wife’s fluctuating income) but I’d think a few years of tax returns would give a lender enough information to assess risk. It would certainly be better than nothing at all. It’s clear that this option was being abused. Now, those in the underground economy might have a problem …
Loans I’ve had had escrow requirements until you hit a certain level of equity. I’d think that the bank is far more likely to keep up with payments than homeowners, despite Liberal’s experience. (It sounds to me that a small claims court lawsuit to recover the costs is in order for that.) In general, my reaction is that it is about time, and that it is unfortunate that it takes a meltdown to get reasonable regulations in place.
What if that allows some people to get a lower interest rate on their loans? Wouldn’t it be better to let people decide for themselves what they want? As long as the language is clear on what the pre-payment penalty is, I don’t see what business it is of the government to ban them.
The first bullet in the proposal seems pretty fuzzy. What exactly does it mean to “consider” the ability of the borrow to repay the loan?
What is reasonable about forcing banks to treat creditworthy people as though they were irresponsible? Or put another way, denying creditworthy people the freedom to govern their own financial affairs?
I don’t see anything here to deal with something that seems to have been a problem for some borrowers: the bank changing the terms of the mortgage and presenting the new terms at the last minute (at which point the borrower either takes it or loses the chance to buy the house, and may lose some deposit money).
They’re going to mandate PMI? That totally stinks! PMI is a ripoff of the consumer; it took me years to get out of paying a monthly PMI, and now the Gummit is going to mandate it for everyone!?? This is terrible!
Wow. We might’ve been screwed had these rules been in place when we bought our house 3 years ago. My husband didn’t have 12 (or is it 24?) months at his job yet, so we had to do a “Stated Income” loan. Even though we did provide 3 prior years’ tax returns, they didn’t come close to “proving” our current level of income, because his salary had doubled when he took the new job, which wasn’t reflected in the prior tax returns. Granted, he provided copies of his most recent payroll check stubs, as well, but they were basically irrelevant since we were doing the “Stated Income” thing.
And I am VERY unhappy with the idea that I will be forced to allow the bank to take my money, sit on it for 6 months at whatever piss-poor interest rate they decide to give me, and make my property tax and insurance payments for me. First of all, I get a better interest rate where I keep my escrow monies than what my mortgage lender would pay me. And second of all, I like paying those bills with my American Express card so that I can get thousands of mileage points, not to mention getting to keep my money an extra month until the payment then becomes due on the credit card.
I’m not suggesting this is a good idea for everyone to do, but it works better for us, and I reap the most benefit from my dollars. I think this new rule stinks.
Are they? I thought it meant that, if you had PMI, the bank would be required to have an escrow account to cover it, and take it into account when determining if you qualify for a mortgage or not. I didn’t see anything on the Fed’s site or in the NYTimes article about requiring everyone to have PMI.
Oh yeah, and this, too. This happened to us TWICE, once when we bought the house and once when we refinanced. These lying sacks stole tens of thousands of dollars from us by pulling this bait-and-switch crap on us. That’s the thing I’d like my Representatives to address – make it fall under the heading of FRAUD.
Seems like these new rules, once again, protect Big Business over the consumer. Thanks a lot, gummint! :mad:
OK, maybe I’m getting my panties in a bunch too hastily. The point does look ambiguous to me reading your cites, but its not necessarily as bad as my first reaction. At least I hope not.
I do agree that escrow accounts are a lesser ripoff. Letting the bank hold onto my tax and insurance money and collect the interest for themselves isn’t a good deal in any sense.
How exactly is creditworthiness proven for loans with no documentation?
I suspect the reason for the escrow accounts is to allow banks to maintain their primary claim on the property, and to reduce the risk it would be sold by the government for nonpayment of taxes. That’s what I get from the relaxation of the requirement with increased equity for the homeowner. If it now a requirement for any amount of loan I agree it is foolish. I’m not sure why the government is requiring it, it might be because now that loans are packaged and sold the original lender no longer cares.
As for showing the ability to repay, surely you don’t believe that people make rational economic decisions as predicted by classical economics anymore. That contention has been falsified by behavioral economists like Thaler. We can’t prevent this, but we can recognize it and mitigate the impact.
I think there might be a misunderstanding. I’m not talking about elimination of escrow altogether. I’m talking about the option to pay taxes and insurance oneself (if one is creditworthy in the eyes of the lenders).
It should be easy enough to require the final signing papers be delivered some days in advance - if only to be able to read them over without lots of people pacing the floor until you’re done. We’ve always got ours well in advance. I’d think that everyone except the lenders would get behind this one. The real estate agents wouldn’t want a sale to disappear, and the seller wouldn’t want to have the house back on the market again - even in a hot market.
Are they not liable in the strict legal sense? I understand that you have to pay in the long term, but I’d think that having a contract with a bank that states that they pay taxes and insurance would mean that you should be able to recover penalties from them. If that is not true, then I’d want to see that restriction eliminated before any escrow requirement.