The newspapers today were filled with headlines that the Fed was curbing "shady lending" practices. Of course, these articles were a little vague on what the name of the regulation was and what date these rules would go into effect.
Going straight to the horse's mouth, I learned that the Fed is amending Reg Z to deal with "higher-priced mortgage loans" in the following manner:
"The final rule adds four key protections for a newly defined category of "higher-priced mortgage loans" secured by a consumer's principal dwelling. For loans in this category, these protections will:
- Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."
- Require creditors to verify the income and assets they rely upon to determine repayment ability.
- Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
- Require creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans. "
It goes into effect October of 2009.
And that's just the federal amendment. California's Senate Bill 1137 passed on July 8, 2008--EFFECTIVE IMMEDIATELY. The legislation requires lenders and mortgage loan servicers to: 1) contact borrowers about restructuring options before beginning the foreclosure process, 2) requires a 60-day notice to be given to tenants of buildings facing foreclosure before they can be removed from a rental housing unit; and 3) allows fines of up to $1,000 a day for owners of foreclosed properties that fail to adequately maintain them.
And folks...I think there is more legislation to come. I have been a bit baffled by S.B. 1137 because while it makes a lot of sense to increase communcation with borrowers and work out a loan modification (I often do this for junior lenders) it doesn't make a lot of sense to prolong the f/c process by another 30 days.
Often if a borrower is trying to walk away--no loan modification would give them an incentive to pay because they do not want to pay a mortgage on a house worth less than the mortgage. Thirty more days simply delays the inevitable--and prolongs our economic slump.