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Mortgage Standards Reform

The Federal Reserve released mortgage standards reform proposal in attempt to curb abuses contributing to the mortgage crisis. The rule would tighten lending criteria and require mortgagors to contribute a minimum 20-percent down payment when buying real estate.

The mortgage standards reform would hold banks accountable for investment decisions by implementing an 8-point checklist to ensure borrowers are capable of repaying borrowed funds. The rule redefines a "qualified mortgage" and will take effect later this year under supervision of the Consumer Financial Protection Bureau

As an active real estate investor, I keep a watchful eye on industry news and reforms. Since 2008, Americans have witnessed banking failure, government bail-outs, millions of foreclosures, mind-blowing levels of mortgage fraud, and numerous programs geared toward helping homeowners prevent foreclosure. To date, few strategies have worked to stop the foreclosure madness, increase home sales, or improve property values.

While I'm hopeful that mortgage standards reform will curb abuses, I can't help but wonder if it will make any notable difference. In recent months, mortgage lenders have been under scrutiny on many levels. To date, banks are being investigated by state Attorney Generals, the Justice Department, Federal Housing Authority, and Securities and Exchange Commission.

It certainly makes sense to reform policies that have allowed banks to engage in questionable lending practices and improper foreclosure. In addition to mortgage standards reform, it has been reported the Short Sale Act of 2011 will be submitted for review by the House of Representatives Committee. If passed, the Act will require lenders to respond to short sale requests within 45 days of homeowners' written request.

Mortgage standards reform is in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act. The primary focus of Dodd-Frank is to ensure consumers receive adequate information to make informed decisions when purchasing financial products or taking out mortgage loans.

A lot of people are up in arms over the mortgage reform proposal. Controversy doesn't stem from holding banks accountable for investment decisions. Instead, it is in regard to proposed underwriting standards regarding Qualified Residential Mortgages (QRM).

QRMs refer to loans that comply with certain requirements that allow banks to avoid risk retention requirements. One qualifying requirement proposed within the reform would be that borrowers must provide a minimum 20-percent down payment when buying houses.

Many people think the minimum down payment is a good idea. Not only would it reduce monthly installment amounts, banks would be at lesser financial risk. Others think the down payment requirement would further stagnant home sales due to limited financing.

In addition to larger down payments, homeowners may lose the mortgage interest deduction if legislation presented to Congress is allowed to pass. Changes have also been proposed to limit Federal Housing Authority loans. A favored program since 1913, FHA insures about 70-percent of loans. If legislation passes, FHA-insured lending would be limited to less than 15-percent.

The way things reform would be more favorable to banks while placing financial hardship on home buyers. However, if lenders would comply with protocol reform could create a more stable real estate market within a few years.

Only time will tell if mortgage standards reform will reduce reckless behavior that took place during the housing boom or create bigger problems due to lack of available financing. We will continue to follow proposed legislation and encourage you to subscribe to our mailing list to stay abreast of changes. We also invite you to peruse our real estate article library packed with hundreds of articles on the state of the market.