New Mortgage Rules Coming October 1, 2009
By: Raynor James | Posted: 21st September 2009
To say the mortgage industry has been in turmoil the last three years is to make just a slight understatement. Homes have gone into foreclosure on a massive scale and banks have failed accordingly. In many cases, this was because homeowners didn’t understand their mortgage. On October 1, 2009, new mortgage rules will go in effect that should help avoid such problems.
The mortgage industry used to be a fairly conservative one. The banks looked for borrowers with excellent credit and the ability to pay. The last 30 years saw more of a move towards issuing mortgages for just about anyone regardless of documentation, credit or whether individuals could afford them. This concept was known as an abusive lending practice. The Federal Reserve and HUD are now issuing new rules to put an end to it.
The new mortgage rules focus on two things. The first is making sure sufficient disclosure is given on the cost of the loans. The idea is to make sure the borrower fully understands what the immediate cost is as well as any future cost should the loan terms change such as during an interest rate reset.
The second rule change is the requirement that the loan be tied to the ability of the borrower to repay it. Lenders can no longer just rely on the value of the home equity as a guideline. Instead, they must verify through independent resources that the borrower has the income and equity to handle the burden of the mortgage.
The new mortgage rules also go after the unique advertising slogans used by lenders. The goal is to provide truth in advertising. If a lender advertises a loan as a fixed rate mortgage, the new rules require that it be such a loan and remain as much throughout its term. The loan cannot switch to an adjustable mortgage after three, five or any number of years.
The new rules are a welcome addition to the mortgage world. That being said, they will make it more difficult for many people to buy a home. In most cases, however, that is because the person can’t really afford the loan to begin with.
Raynor James writes for FSBOAmerica.org - where you can ask a lender mortgage questions for free.
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Tags: understatement, lenders, borrowers, loan terms, new mortgage, fixed rate mortgage, foreclosure, federal reserve, mortgage industry, turmoil, hud, move towards, adjustable mortgage, massive scale, welcome addition