Many of the items in the measure relate to mortgage loan financing. The summary below tells us part of the story — it does not tell us what was left out of the legislation and it says nothing about the specific exceptions and benefits buried in the text. (The last revision of the bill was 1,616 pages in length so you can bet there are plenty of goodies for various special interests. We’ll know more when the final text is published.)

Below is a list of inclusions in the bill, as reported by the Financial Services Committee.

Mortgage Reform

• Require Lenders Ensure a Borrower’s Ability to Repay: Establishes a simple federal standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold.
• Prohibit Unfair Lending Practices: Prohibits the financial incentives for subprime loans that encourage lenders to steer borrowers into more costly loans, including the bonuses known as “yield spread premiums” that lenders pay to brokers to inflate the cost of loans. Prohibits pre-payment penalties that trapped so many borrowers into unaffordable loans.
• Prohibit Unfair Lending Practices: Prohibits the financial incentives for subprime loans that encourage lenders to steer borrowers into more costly loans, including the bonuses known as “yield spread premiums” that lenders pay to brokers to inflate the cost of loans. Prohibits pre-payment penalties that trapped so many borrowers into unaffordable loans.
• Establishes
  Penalties for Irresponsible Lending: Lenders and mortgage brokers who don’t comply with new standards will be held accountable by consumers for as high as three-years of interest payments and damages plus attorney’s fees (if any). Protects borrowers against foreclosure for violations of these standards.
• Expands Consumer Protections for High-Cost Mortgages: Expands the protections available under federal rules on high-cost loans — lowering the interest rate and the points and fee triggers that define high cost loans.
• Requires Additional Disclosures for Consumers on Mortgages: Lenders must disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.
• Housing Counseling: Establishes an Office of Housing Counseling within HUD to boost homeownership and rental housing counseling.

Related Changes

• Establishes a Consumer Financial Protection Bureau.
• Monitor Personal Financial Rating: Allows consumers free access to their credit score if their score negatively affects them in a financial transaction or a hiring decision. Gives consumers access to credit score disclosures as part of an adverse action and risk-based pricing notice.

New Mortgage Loan Protections Outlined in Wall Street Reform is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: ability to repay, consumer, Consumer Financial Protection Bureau, counseling, credit score, disclosures, Dodd, Frank, high-cost loans, lender, lending, loan, mortgage, penalties, practices, pre-payment penalties, unfair, Wall Street Reform and Consumer Protection Act

It was on that date that Freddie Mac said it would no longer purchase subprime mortgages and high-risk mortgage-backed securities.

Who says? The Federal Reserve Bank of St. Louis. It has come up with a financial crisis timeline which looks at the major events of the past few years.

The timeline is a smart idea, lists a lot of events and has good links and resources. That said, we can surely add a few items…

Sins of Omission

The timeline looks at events that happened, but it does not look at the steps which were not taken. For instance, the Federal Reserve has had the right to ban mortgages and mortgage activities which represent “unfair and deceptive acts or practices– (UDAP) under the Home Ownership Equity Protection Act of 1994 (also known as “HOEPA– — Section 32 of Regulation Z, part of the Truth in Lending Act). Since the Fed didn’t do anything to protect the public there’s no mention of its failure on the timeline. It was a sin of omission.

Glass-Steagall Act

We could go back further. For instance, the Glass-Steagall Act was repealed in 1999 — since the Depression it had prohibited banks from engaging in both commercial and investment banking. Armed with new powers, many large banks ultimately became involved with investments they didn’t understand and then left taxpayers with the bill.

Net Capital Rule

Here’s one more: On April 28, 2004 the Securities and Exchange Commission passed a revised “net capital” rule which would allow the brokerage subsidiaries of large banks to buy securities equal to as much as 30 times their capital base as opposed to the old standard of 12 times.

In other words, if you had $1 billion in capital you could borrow enough to buy securities worth $30 billion instead of $12 billion. Seen another way, leverage increased dramatically because the requirement for banks to have reserves fell from 8.5 percent to 3.3 percent. (For a good explanation, see: The SEC Killed Wall Street On April 28, February 18, 2009)

And you wonder why big banks got in trouble.

The good folks at the St. Louis Federal Reserve have done a good deed with their timeline, and hopefully it will be revised to include sins of omission as well as earlier events.

When Did The Mortgage Meltdown Begin? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: acts, capital, deceptive, federal, HOEPA, net, practices, reserve, rule, SEC, St. Louis, UDAP, unfair

Under the Home Ownership Equity Protection Act (HOEPA), the Fed has the power to fight “unfair and deceptive acts or practices” or, as they’re called, UDAP. In fact, the Fed has had such power since 1994 and therein lies the rub.

The purpose of financial regulation is to create something of a level playing field. In real estate, for example, you can’t have a “net” listing. Yes, such listings could produce big profits for brokers, but state regulators across the country have banned such arrangements because of their obvious potential for abuse.

Federal regulators, in contrast, have traditionally taken a cautious approach to lenders but in the past few years they left the financial marketplace untouched and the result has been obvious: You didn’t have option ARMs or the widespread use of stated-income loan applications in the past because previous administrations telegraphed their positions to lenders: You can go so far, but no further.

Until the second Bush Administration the deal with the lending community was this: You can make profits, big profits, but use some care and caution otherwise we’ll be forced to create a bunch of regulations that will reduce your revenues. In other words, a gentleman’s agreement of sorts, an unspoken arrangement that worked fairly well for everyone.

The Bush Administration has a different view. It is not a “conservative” perspective — remember, no lender issued option ARMs when Ronald Reagan was in office — instead, with Mr. Bush we have a radical and absolutist political philosophy which argues that unfettered markets are the sure solution to all problems.

Under the Bush approach if a lender makes dim-witted loans and doesn’t bother to effectively underwrite mortgage applications the marketplace will respond. There’s no need for government action because in time loans will fail and shareholders will lose money.

The Bush regulatory theory may be worth debating in some seminar regarding abstract political philosophies, but in the real world we are each inter-connected. If large numbers of lenders make large numbers of foolish loans, it’s not only shareholders who suffer, it’s the value of our house that falls when neighbors are foreclosed.

Given the radical and extreme thinking of the past few years, we are now seeing radical and extreme responses. To right the financial ship of state — if that is possible without further dislocations — the federal government has now embarked on an economic path normally associated with third-world countries. For instance:

• The federal government over the summer of 2008 quickly and with little debate established the right to buy Fannie Mae and Freddie Mac. If this were being done by governments in Malawi, Cuba, Venezuela or Rumania, we would be talking about “nationalization” and all that the term implies.
• The Securities and Exchange Commission over the summer applied special rules to prevent short-selling — but only for 19 favored companies. In effect, we replaced the free-market system with two classes of corporations, those protected from short-sellers and those which are not.

• The Federal Reserve has made hundreds of billions of dollars in friendly loans available to selected banks and private entities on Wall Street. These loans are secured by assets of dubious quality — if the quality were so good then surely such assets could just be sold on the open marketplace. Meanwhile, legislation to help 400,000 borrowers with toxic loans was stalled for months because of alleged worries that the cost might total $4 billion.

The tragedy here, the disgrace here, is that none of this was necessary.

Go back to the new Federal Reserve rules introduced over the summer of 2008. They are weak and timid; most “protections” only apply to “high-priced” loans, meaning not prime or ALT-A financing.

But imagine if the new standards had been instituted in 2002 and 2003: For instance, the new rules say that lenders must “verify the income and assets they rely upon to determine repayment ability” when making “high-priced” loans. In other words, stated-income loan applications are out for subprime borrowers. Would there be a subprime crisis today if such baseline standards had been introduced when they were actually needed?

What makes no sense is the lack of anger. If Canadian trade regulations caused $500 billion or a trillion dollars worth of damage to the U.S., the entire country would be irate. But if a few federal bureaucrats, zealots and elected officials produce the same result, no one seems especially distressed — and that should worry us all.

————————

Published originally by The Real Estate Professional and posted with permission.

Mortgages & The Unnecessary Crisis is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: application, ARM, deceptive, HOEPA, Home Ownership and Equity Protection Act, income, interest-only, Mortgages, option, stated, UDAP, unfair