U.S. Mortgage Rules Revised

Efforts by Federal Reserve to modify the mortgage rules and to stop the unnecessary feuds in the mortgage business has got a mixed response from the various sections of the society.

The proposed rules intended to protect borrowers from unscrupulous lending practices and impose certain regulations on the lenders. High risk mortgages will be curbed under new rules as the new rules prohibit a lender from engaging in a pattern or practice of lending without considering borrowers' ability to repay the loans from sources other than the home's value.

The mortgage industry needed some strict measures from sometime in order to control the increasing use of abuses in the business. Randall Kroszner, the Fed governor, who was in charge of the complete repair program, was hopeful that the new measures will help in improving the state in which the business was run.

He also added that the new rules would make it likely that "responsible capital will again flow to traditionally under-served borrowers and communities".

The main problems that exist in the mortgage industry are: Lenders give sub-prime loans without completely ensuring the borrower’s ability to repay the loan from sources other than the home's value. Lenders also assume that rising home prices will compensate for a buyer's stretched personal finances. This leads to an increase in the number of defaulter cases, which increases tension in the industry.

One more problem that exists is that the brokers hide their fees from the borrowers and also find ways to increase the prices of the houses which help them charge more fees from the borrowers.

The new proposed rules say that the loans require appropriate documentation and also require mandatory escrow accounts to ensure that subprime borrowers' property taxes and home insurance were paid.

Brokers will have to disclose their fee in advance and advertisements promoting loans with low initial teaser rates will be required to state that later higher rates will be charged and this has to be done in a way that the borrower is not in dark about the exact interest he will have to pay.

Some institutions have welcomed the changes made in the rules whereas some people think that the Fed has not yet been able to implement the right laws which are the need of the hour.

Many Democrats are disappointed with the efforts of the Fed as they were demanding tougher rules on assessing the ability to repay and an outright ban on commission arrangements that reward brokers for steering customers into higher rate loans.

Chris Dodd, Chairman of the Senate Banking Committee, said the proposal was "deeply disappointing", while according to Barney Frank, Chairman of the House Financial Services Committee, it confirmed his belief that the Fed "is not a strong advocate for consumers".

On the other hand, Kieran Quinn, chairman of the Mortgage Bankers Association, applauded the Fed's efforts but also raised some concerns on some rules mentioning that "some of the restrictions in the proposals may unnecessarily limit the credit options available to borrowers".

According to the lenders, one of the major drawbacks of the new rules is that they have not really been able to target the brokers and most of the rules create obligations for mortgage lenders. The new sets of rules help the larger organizations to play with the rules to generate benefits for them.

Federal Reserve defended all the arguments by saying that at present the mortgage industry has many problems and any new rules which can ensure even some benefits should be welcomed and not criticized for not being able to cater to the needs of every person.

Charles Schumer, Chairman of the Joint Economic Committee, said the efforts by the Fed are not sufficient and Congress would have to impose a strict legislation itself in order to ensure the safety of the consumers.