Fed Chair Proposes New Regulations to Strengthen Home Mortgage Markets
Friday, March 14, 2008Today at the NCRC 2008 National Conference, Fed Chair Ben Bernanke outlined the rules proposed by the Federal Reserve Board under its HOEPA authority in December. These rules are aimed at cleaning up the home mortgage markets, and are aimed at preventing future or continuing abuses in mortgage lending. These rules ban unfair or deceptive practices and apply to the entire mortgage industry–not just to institutions directly regulated by the Board. The public comment period for these proposed regulations ends on April 8, 2008. The rules that the Fed Chair outlined at the conference in his keynote address are:
- Prohibition on lenders from engaging in a pattern or practice of making higher-priced loans that borrowers cannot reasonably expect to repay from income or assets other than the house.
- Lenders will be required to verify information on income and assets that they rely on in making credit approval decisions for higher-priced loans.
- An escrow account for real estate taxes and hazard insurance will be required for higher-priced loans. Escrowing is now a standard practice for prime loans, and the Fed proposes to make it standard in the high-cost loans segment of the market as well.
- Ban on prepayment penalties in situations where the borrower may be especially vulnerable. When such penalties are permitted, they would have to expire at least 60 days before a scheduled increase in the loan payment.
- Ban on specific advertising practices deemed as unfair or deceptive.
- Consumers should be provided Truth in Lending Act disclosures early in the application process so that they can shop more effectively based on the information.
The Fed Chair also emphasized the need to prevent preventable foreclosures. For families who cannot sustain homeownership, he pointed out that new places to live will have to be found. In this context, he emphasized the need to maintain an adequate supply of affordable rental housing. He suggested that because vacant homes impose heavy costs on neighborhoods, it is important to keep homes occupied. He pointed out that there are efforts underway to make vacant homes ready for occupation, and some of these efforts will help preserve the supply of affordable housing.What the Fed Chair did not say?
He did not reiterate his advice to lenders to reduce the principal of their mortgage amount. Chair Bernanke had, to the surprise of many bankers, offered this advice before an audience of community bankers in Florida earlier this month. The reiteration of such a proposal might have been welcomed by participants at the NCRC conference.
The regulations approach that Bernanke took in his remarks at the conference is preventive rather than ameliorative of the current housing crisis. He offered little of use to homeowners already in default or foreclosure, or those facing negative equity in their homes because home prices have fallen a great deal.
The full text of Chairman Bernanke’s keynote address is available on the Federal Reserve Board website.
Nandinee K. Kutty is an economist and a policy consultant. Dr. Kutty has authored papers in peer-reviewed journals of economics and policy. She is an editor of and contributor to a recent book on housing policies in America published by Routledge. She has a Ph.D. in economics from the Maxwell School, Syracuse University, where she was awarded the Roscoe Martin Dissertation Award, and a University Fellowship. She was formerly an assistant professor at Cornell University. She has been awarded numerous grants for research and innovative teaching.