It may be too late to help victims of the current housing bubble's deflation, but the Federal Reserve and several other agencies jointly issued new guidance for subprime mortgage lenders that more strictly enforces the terms under which borrowers can be offered "creative" mortgage products.
The inter-agency recommendations include clear and comprehensive depictions of timelines for adjustable-rate mortgages, which often begin with a low "teaser" rate and then reset to a much higher rate than unsuspecting homeowners are capable of paying.
Other recommendations include full verification of borrowers' incomes, clear product disclosures and warnings for prospective borrowers, and prepayment penalty limits that would give homeowners up to 60 days to refinance into fixed loans without paying additional fees.
"Institutions should verify and document the borrowers income (both source and amount), assets and liabilities," the agencies recommended.
"Stated income and reduced documentation loans to subprime borrowers should be accepted only if there are mitigating factors that clearly minimize the need for direct verification of repayment capacity. Reliance on such factors also should be documented."
The policy was crafted by the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision, the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (CUNA).
The new guidance is voluntary and only affects Federally-regulated lenders, but even that was enough to inspire protests from the Mortgage Bankers' Association, which said the new guidelines might cause a reduction in access to credit for homebuyers, as well as inspire Congress to pass laws to enforce the new guidance.
"[Congress should] refrain from passing legislation that will further constrain credit by forcing lenders to deal with rigid underwriting standards and litigation risk," http://www.mortgagebankers.org/NewsandMedia/PressCenter/55386.htm said MBA chairman John Robbins. "Instead, Congress should focus on legislation to improve transparency and accountability throughout the mortgage transaction.
Even the relatively mild guidance recommendations from the Fed signals a shift in policy towards home lending.
Under former chair Alan Greenspan, the Fed encouraged easy access to credit in order to push for more home ownership, but current chair Ben Bernanke has said that financial institutions need to reconsider their lending standards and offer more counseling and education services for prospective buyers seeking mortgages.
Congress has been critical of the Fed's efforts to provide guidance on the subprime lending crisis, even as thousands of homeowners faced default or foreclosure due to skyrocketing payments on loans they didn't fully understand.
Many subprime lenders specifically targeted black and Latino first-time homebuyers, pushing them into expensive subprime loans even when they could have afforded traditional fixed-payment mortgages at prime lending rates.
As home inventory has increased and prices have fallen, many cash-strapped homebuyers are unable to sell homes they can no longer afford to live in, and foreclosure rates are rising.
Foreclosure data tracking firm RealtyTrac recorded a 90 percent increase in home foreclosures between May 2006 and May 2007.
