Fed Tightens Regulations: Not nearly enough, far too late.

[SirNitram]

Link

July 14 (Bloomberg) -- The Federal Reserve tightened its mortgage rules by requiring lenders to determine a borrower's ability to repay and barring other practices that led to the collapse of the U.S. housing market.

The Fed Board of Governors voted in Washington today to require that lenders verify a homebuyer's income or assets, and create an escrow account for property taxes and homeowners' insurance. The rules curb penalties for repaying a loan early.

``It seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower,'' Fed Chairman Ben S. Bernanke said today at the meeting.

The Fed is responding to criticism from Democrats in Congress who blame the central bank for neglecting its authority to protect consumers from unfair mortgage and credit-card lending practices. The Fed adopted the rules under authority it won 14 years ago.

U.S. foreclosure filings rose 53 percent in June from a year earlier, with one in 501 U.S. households entering the foreclosure process, RealtyTrac Inc., a seller of default data, said July 10. Foreclosures climbed as adjustable-rate mortgages reset, and property owners were unable to keep up the payments.

``These changes have made for better rules that will go far in protecting consumers from unfair practices and restoring confidence in our mortgage system,'' Fed Governor Randall Kroszner said.

Prepayment Penalties

The rules ban prepayment penalties on loans whose payments can change during the first four years, and limit such charges to the first two years on other types of subprime mortgages.

Prepayment penalties are fees lenders charge borrowers who pay off their mortgages early, usually to refinance into a less expensive loan. Consumer groups say the fees trap borrowers in mortgages they can't afford to repay. Lenders say the charges let borrowers pay lower interest rates and make mortgage-backed securities more valuable to investors.

The Fed declined to ban all prepayment penalties after a Columbia University study showed that borrowers with such penalties on fixed-rate mortgages paid lower rates of interest, Kroszner said in a briefing with reporters after the meeting.

The rules take effect Oct. 1, 2009. They won't apply retroactively, said Kathleen Ryan, counsel for the Fed's consumer and community affairs division.

Broker Fees

Bernanke questioned a staff recommendation not to ban a practice that lets lenders pay brokers based on the interest rates they charge a consumer, which he said sets an incentive for brokers to steer people into more expensive loans.

``Staff considered a rule that would ban that type of payment, but we ran into some serious, practical problems,'' Ryan said. She said it would be difficult to distinguish between the practice and legitimate payments to brokers.

The Fed issued the rules using authority under a 1994 law aimed at protecting consumers in mortgage lending. Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, had prodded the Fed to write the new regulations.

The very serious, practical problem of doing their damn jobs.

[Darth Wong]

Canada also recently announced new mortgage regulations, limiting mortgages to 35 year terms at most, forcing 5% minimum down payments, and specifying minimum credit scores of 620 (although I have no idea how credit scores are measured, or what a credit score of 620 means).

[SirNitram]

Canada also recently announced new mortgage regulations, limiting mortgages to 35 year terms at most, forcing 5% minimum down payments, and specifying minimum credit scores of 620 (although I have no idea how credit scores are measured, or what a credit score of 620 means).

There are formulae; 620 is a few points below average, IIRC. The formulae are somewhat arbitrary in that the three sources of credit ratings will spit out different scores, and of course, the bizarre things like 'Has not held enough credit to be issued credit'.

[Master of Ossus]

Canada also recently announced new mortgage regulations, limiting mortgages to 35 year terms at most, forcing 5% minimum down payments, and specifying minimum credit scores of 620 (although I have no idea how credit scores are measured, or what a credit score of 620 means).

What does the 35 year term mean for interest-only loans? Do they have a balloon payment at the end of that term, then?

[Darth Wong]

Canada also recently announced new mortgage regulations, limiting mortgages to 35 year terms at most, forcing 5% minimum down payments, and specifying minimum credit scores of 620 (although I have no idea how credit scores are measured, or what a credit score of 620 means).

What does the 35 year term mean for interest-only loans? Do they have a balloon payment at the end of that term, then?

I don't believe they allow interest-only loans. To be honest, I didn't know there was such a thing.

EDIT: I just did some checking and you can in fact get interest-only loans here. However, there has to be a fixed term (10 years at the most), at the end of which you must either pay the principal or convert it to a standard loan. It's not as popular or well-known here as it is in the US, apparently.

[aerius]

What does the 35 year term mean for interest-only loans? Do they have a balloon payment at the end of that term, then?

It's interest only for up to the first 10 years, usually much less than that. Then the loan resets into a regular mortgage for the remainder of the term. I don't know if they still offer those though, a lot of mortgage products have been phased out in the year or so.

[Solauren]

Canada also recently announced new mortgage regulations, limiting mortgages to 35 year terms at most, forcing 5% minimum down payments, and specifying minimum credit scores of 620 (although I have no idea how credit scores are measured, or what a credit score of 620 means).

I hadn't heard about the 5% minimum downpayment requirement. Is that a blanket requirement, or for properties over a certain minimum value?

[FireNexus]

Canada also recently announced new mortgage regulations, limiting mortgages to 35 year terms at most, forcing 5% minimum down payments, and specifying minimum credit scores of 620 (although I have no idea how credit scores are measured, or what a credit score of 620 means).

Credit scores are calculated based on a pretty complex formula that takes into account timeliness of payment, amount of credit offered and utilization of lines.

620 would make a person sub-prime, but not terribly so. He probably either has a relatively high utilization on his accounts, or has quite recently made a moderate number of late payments (Maybe one time 30 days late for every two or three accounts). The 620 person is a good risk for a secured loan if you have a meaty down payment and verified income, as well as a history at the current employer of at least two years.

Also, all things being equal, any bureau will spit out the same number if they're using the same formula (most popular is the FICO score from Fair Isaac), but oftentimes the different bureaus have different info, since reporting is optional on the part of the creditor, and sometimes they either don't report to specific bureaus or report on a staggered scale.

The canadian regs would probably have prevented the sub-prime fiasco here from exploding. In my opinion, though, that score should be on a sliding scale inversely proportional to cash down. If someone with an abyssmal score can put down a 50% deposit on the property, the odds are good he's able to pay it back, for instance.

[The Kernel]

Canada also recently announced new mortgage regulations, limiting mortgages to 35 year terms at most, forcing 5% minimum down payments, and specifying minimum credit scores of 620 (although I have no idea how credit scores are measured, or what a credit score of 620 means).

What does the 35 year term mean for interest-only loans? Do they have a balloon payment at the end of that term, then?

I don't believe they allow interest-only loans. To be honest, I didn't know there was such a thing.

EDIT: I just did some checking and you can in fact get interest-only loans here. However, there has to be a fixed term (10 years at the most), at the end of which you must either pay the principal or convert it to a standard loan. It's not as popular or well-known here as it is in the US, apparently.

It used to be incredibly popular where I live in the San Francisco Bay Area because people buy houses around here first as an investment, with having a place to live being purely secondary. People will use interest only loans to get into more expensive real estate that they can then flip for a larger profit after a couple of years, then find a new place and start the cycle all over again.

This sounds nuts, but the majority of home owners I know do it this way. They are only now contemplating a principal loan on their house since the real estate market has mostly flattened.

[J]

I hadn't heard about the 5% minimum downpayment requirement. Is that a blanket requirement, or for properties over a certain minimum value?

Some background. Mortgage insurance from the CMHC allows the borrower to secure a better rate from the lender. For instance, if I want a 30 year $300k mortgage with 5% down with no insurance, the bank will quote me say, 10% for example. If I buy insurance from the CMHC I can get 7%, and the cost of insurance gets tacked onto my monthly payment and I end up paying the equivalent of 8.5%, meaning I save a bunch of money.

What the new law states is that 40 year mortgages are gone, you can't get them anymore. Further, to qualify for an insured mortgage the borrower needs to put 5% down, he can still get a 0% down mortgage but it won't be insured, thus he'll have to pay higher interest rates. This puts a damper on speculation and flipping houses for profit.

In short, if you want an insured mortgage with the best rates you have to put 5% down, and this applies to all mortgages regardless of value. You can still get a 0% down mortgage, you'll just pay through the nose for it.

[Tsyroc]

The changes are in Canada's new mortgage laws are interesting.

I though that in the US a borrower already had to put 20% down if you didn't want to have to pay for mortgage insurance. Maybe it was only 10% but I thought it was 20%.

If that was the case, I'd think that a lot of insurance companies would have been hurting from people defaulting on their loans but I've really only heard of financial institutions having problems. They wouldn't be self insuring on loans where people didn't put the minimum down themselves would they? I can see them doing that thinking they could make more money but it would really screw them hard if a lot of people with those sort of loans all defaulted around the same time.

[Dahak]

Canada also recently announced new mortgage regulations, limiting mortgages to 35 year terms at most, forcing 5% minimum down payments, and specifying minimum credit scores of 620 (although I have no idea how credit scores are measured, or what a credit score of 620 means).

The scores from credit bureaus are, as mentioned above, calculated according to complex formulae, which incorporate a lot of characteristics from "you". Almost every country has different bureaus with different scorings.
And then you have "internal" scorings (for those who do it). When you apply for a loan, car financing, or the like, the bank will calculate its own internal scoring according to which it will grant the proposal.
You can have it "primitively", where you just check some characteristics on the proposal, add in the reported scores, probably cut-offs and some policy rules and then make a decision, up to a full-blown Basel-II-process with probability calculations included (as we do were I work).

[mr friendly guy]

Just for interest, for those who obviously know a bit about these credit scores, whats a ball park figure for someone who

a) always pays back their credit card on time and has never defaulted

b) someone who initially uses one credit card to pay off another card (and saves via the interest free period while transfering balances between cards), but at the end of the day still managed to pay off the final bill

c) the average credit score

[Col. Crackpot]

Credit scores are calculated based on a pretty complex formula that takes into account timeliness of payment, amount of credit offered and utilization of lines.

620 would make a person sub-prime, but not terribly so. He probably either has a relatively high utilization on his accounts, or has quite recently made a moderate number of late payments (Maybe one time 30 days late for every two or three accounts). The 620 person is a good risk for a secured loan if you have a meaty down payment and verified income, as well as a history at the current employer of at least two years.

Also, all things being equal, any bureau will spit out the same number if they're using the same formula (most popular is the FICO score from Fair Isaac), but oftentimes the different bureaus have different info, since reporting is optional on the part of the creditor, and sometimes they either don't report to specific bureaus or report on a staggered scale.

The canadian regs would probably have prevented the sub-prime fiasco here from exploding. In my opinion, though, that score should be on a sliding scale inversely proportional to cash down. If someone with an abyssmal score can put down a 50% deposit on the property, the odds are good he's able to pay it back, for instance.

The problems with Fair Isaac are:

the calculus for tabulating the score is considered intellectual property and not known to anyone outside of Experian, Trans Union or Equifax.

Each agency uses a different method and therefore gets a different score.

The Fed is supposedly forcing the agencies to disclose their formulas and standardize the system, but i'm not holding my breath.

[Solauren]

I hadn't heard about the 5% minimum downpayment requirement. Is that a blanket requirement, or for properties over a certain minimum value?

Snipped

Thank you J, that cleared it up for me nicely.

40 year mortgages arn't really a big loss. 35 year mortgages are still around, and more realistic anyway.

After all, with optional retirement at 55, if you start your career at 20, that's 35 years anyway...