Mortgage Standards Reform
A mortgage standards reform proposal was recently released by the Federal Reserve as the government attempts to curb abuses that have contributed to the mortgage crisis. The rule would further tighten lending criteria to ensure borrowers are capable of repaying their housing debt. It would also require buyers to provide a minimum 20-percent down payment when buying real estate.
The mortgage standards reform redefines a qualified mortgage and includes an 8-point checklist which holds mortgage providers accountable for investment decisions. The new rule takes effect later this year and will be governed by the Consumer Financial Protection Bureau.
As a California real estate investor, I keep watch over industry news and government reforms. In the past 3 years, American taxpayers have carried the burdens of failed banks, government bail-out programs, mortgage fraud, and countless home foreclosures.
Although plenty of programs have been instituted to help homeowners avoid foreclosure, few have made much difference. New home sales are still lagging. Property values are still dropping and thousands of homeowners are losing their property via improper foreclosure.
While I hope that mortgage standard reforms will curtail abuses, I have doubt. In recent weeks the news outlets have reported a barrage of stories regarding the unscrupulous behavior of Wall Street investors and banks. Their greed has taken an entire nation to its knees, yet no one has been held accountable.
There is hope this will change in the upcoming months. In the past 30 days, investigations have been initiated regarding bank conduct within the mortgage industry. Thus far, several major banks are under investigation by the Justice Department, Securities and Exchange Commission, state Attorney Generals, and the Federal Housing Authority.
The importance of mortgage standards reform is that it applies to the entire mortgage industry. Every bank that underwrites a loan must verify borrowers' income and provide guarantee that borrowers have ability to repay their mortgage note. If banks had followed this type of protocol during the real estate boon the market would not be where it is today.
Many politicians are furious about the rule, claiming it would give too much power to consumer protection bureau that would oversee compliance. Consumer groups are ecstatic because banks would be held accountable for loans during the first five years if borrowers default on the note.
There's also talk that mortgage reform proposal addresses underwriting standards for qualified residential mortgages. QRMs qualify for exemption from requirements that banks retain a share of loans they originate and package for securitization. Exempt loans include mortgages guaranteed or originated by VA, FHA, and USDA.
QRMs are covered under the Dodd-Frank Wall Street Reform and Consumer Protection Act which significantly changed the American financial regulatory system in 2009. A primary role of Dodd-Frank is to ensure consumers are adequately informed when taking out home loans or purchasing financial products.
In compliance with Dodd-Frank, proposed mortgage reform would require mortgagors to contribute a minimum 20-percent down payment. A lot of buyers and investors are not in favor of this portion of the rule. Neither are realtors, as they feel this would further reduce home sales.
Regardless of which side of the fence you're on there is no doubt some type of positive reform needs to occur. Banks need to be held accountable for investment choices and buyers need to make responsible purchases. Gone are the days of buying houses with no money down and no income verification.
For now, we can only wait and see if mortgage standards reform will reduce potential for banks to engage in unscrupulous lending practices. We'll continue to follow this rule and invite you to stay abreast of market changes by subscribing to our mailing list. We also invite you to browse our real estate article library covering topics of foreclosure prevention, real estate investing, and personal finance.
Published on May 21, 2011 at 10:14 AM | Comments: 1